Banks must show growth in RuPay debit card, UPI usage to claim full MDR incentives

BHIM is an Indian mobile payment app developed by the National Payments Corporation of India, based on the Unified Payments Interface.

Banks will have to report growth in RuPay debit card and Unified Payments Interface (UPI) transactions to claim the full incentive of the government’s Rs 1,300-crore scheme, according to a government notification.

On December 15, the Cabinet approved the scheme to incentivise banks and, through them, payment gateways and UPI players for transactions, bringing in some relief for these players.

The fineprint of the scheme says that banks will be reimbursed on a quarterly basis with 95 percent of the claimed amount. To be eligible for the balance 5 percent, they are required to show at least 10 percent year-on-year (YoY) growth in the number of RuPay Debit card and 50 percent YoY growth in UPI transactions by the end of the last quarter of the scheme.

The notification adds that transactions for one year will be incentivised starting April 1, 2021 and the growth will be assessed by the Ministry of Electronics and Information Technology (MeitY) after the end of the duration of the scheme on March 31, 2022.

Although in debit cards as well as UPI transactions, only Person-to-Merchant (P2M) or transactions between customers and businesses can be charged, the government has said that growth should be reported on an overall basis. That means the growth in usage has to include person-to-person (P2P) payments, i.e. fund transfer transactions among customers, as well.

UPI and RuPay debit cards fall under the government’s Zero-Merchant Discount Rate (MDR) norm that came into effect on January 1, 2020. The norm mandates that no fees should be levied on merchants for accepting consumer payments from these modes.

MDR is the main source of revenue for card networks, payment gateways and other payment service providers. With UPI taking over the payments landscape in India and making up over Rs 7 lakh crore in monthly transactions, UPI providers like PhonePe, Google Pay, and Paytm Payments Bank earn no revenue.

In terms of the MDR that will be reimbursed under the scheme, 0.40 per cent up to a maximum of Rs 100 will be refunded for RuPay debit card transactions involving insurance, mutual fund, government, education, railways, agriculture, fuel, jewellery, and hospitals. RuPay debit card transactions other than those will attract 0.15 percent in MDR capped at Rs 6.

UPI transactions up to Rs 2,000 will be incentivised at 0.25 percent for transactions involving insurance, mutual fund, government, education, railways, agriculture, debt collections, fuel, petroleum products, telecommunications, utility payments, business/ personal services and hospitals.

Other P2M transactions up to Rs 2,000 will be incentivised at 0.15 percent of the transaction amount, the notification said.

Moneycontrol had earlier reported that the acquiring bank or the merchant’s bank will share the reimbursed amount with payment gateways like CC Avenues, PayU and BillDesk, or UPI payment service providers like PhonePe and Google Pay, or PoS machine players like Pine Labs and Innoviti Payment Solutions.

UPI’s growth and the MDR debate

Since the beginning of the current financial year (FY22), UPI transactions have witnessed tremendous growth fueled by the growth in online transactions, purchases and payments. Overall monthly transactions have increased from 254 crore in April to 419 crore in November as per the latest data by the National Payments Corporation of India (NPCI).

The value of transactions has jumped from Rs 4.90 lakh crore in April to Rs 7.68 lakh crore in November. However, P2M payments made up only 39 percent of the overall transaction volumes in November.

The government’s rationale behind not charging merchants directly for accepting UPI or RuPay debit card payments is to drive the adoption of these homegrown payment modes. With no charges, these modes of payments will be treated at par with cash transactions by merchants.

With the UPI driving digital acceptance in India and setting new records every few months, there has been a constant question over why should private entities continue to provide UPI for free. Many have raised questions over how can businesses be expected to do charity on this front.

Sameer Nigam, Founder and CEO of PhonePe, which has a 47 percent share of monthly UPI transactions, has made his views clear that a certain charge should be allowed to encourage more companies to provide UPI as a service.

“Any industry where you’re assuming that you’ll be powering a billion transactions a day requires tonnes and tonnes of capital. In fact, it requires some pretty incredible and very expensive engineering talent. Honestly, a 30-basis-point MDR structure would have actually generated more income for the industry at large,” Nigam told Moneycontrol on April 3.