Govt to incentivise UPI and RuPay transactions. Banks, UPI players see revenue hopes

Representative Image (REUTERS/Danish Siddiqui)

After close to two years of not earning revenue from Unified Payments Interface (UPI) and RuPay debit cards, payment service providers and banks are now hopeful of earning some incentive.

The industry is still awaiting more clarity on various nuances after the announcement on yesterday’s Cabinet decisions.

In a continued push to promote the usage of homegrown modes of digital payments, the Cabinet on December 15 approved a Rs 1,300-crore scheme to incentivise small merchants for charges levied on accepting transactions through RuPay debit cards and low-value UPI transactions. This charge is called Merchant Discount Rate (MDR).

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

Now, 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.

How is the scheme expected to work?

“The government will reimburse merchants for RuPay and low-value UPI. MDR worth Rs 1,300 crore for the next one year will be reimbursed. In a way, this is an investment by the government to push digital payments,” said Ashwini Vaishnaw, Union Minister for Railways, Communications, Electronics and Information Technology while making the announcement.

According to sources, the industry expects this to work like a previous notification released in 2017 with an aim to subsidise MDR charges on Debit Cards/BHIM UPI/AePS transactions of value less than or equal to Rs 2,000. Back then, the government had allocated Rs 2,500 crore in the FY18 budget for this purpose.

A merchant, according to the government, will not be charged for accepting payments through these modes from a customer. Transactions between customers and merchants are referred to as Person-to-Merchant (P2M) transactions.

The government will then pay the acquiring bank or the merchant’s bank which receives the payment. In turn, the bank will have to 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.

For UPI, P2M transactions made up 39 percent of the overall transaction volumes in November, according to the latest data from the National Payments Corporation of India (NPCI).

If merchants are not charged for accepting digital payments, the adoption can be faster and a UPI or RuPay debit card payment will be at par with cash transactions.

While the amount of charges that will be reimbursed is not known, the industry expects the charges for RuPay debit cards to be brought at par with Visa and Mastercard in the range of 0.25 percent or 25 basis points of the transaction amount.

The long-standing MDR debate

With 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.

“The industry has had its share of problems since the announcement of Zero-MDR but they will greatly benefit from this initiative of reimbursement of transaction charges levied on digital payments, which will help them to scale up payments infrastructure in the country, thereby enhancing financial inclusion,” Infibeam Avenues Director Vishwas Patel, who is also the chairman of the Payments Council of India (PCI), said.

Payments ecosystem players believe that allowing businesses to earn industry-level revenues from these transactions will encourage more companies to provide UPI services and banks to promote RuPay cards.

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.

However, with only low-value UPI transactions to be incentivised, it will be seen as to how much ecosystem players will pocket after the small share of charges are divided among all.