The upcoming Budget is awaited with some trepidation by the payments industry, given the government’s outright refusal to relax its stand on zero MDR or to absorb costs, the proposed mandate to banks to continue acquiring merchants, and even a possible industry-wide MDR waiver. The last is perhaps the bigger concern, that the removal of MDR for Section 269SU payment modes is just the beginning.
It is hoped that the requests of the NPCI, IBA, PCI and the like will bear fruit, however indications so far are that zero MDR is here to stay. The payment industry needs to come up with alternative and sustainable sources of revenue, and fast.
Dealing with the prohibition under Section 10A
The first thing for payment service providers (‘PSPs’) is to deal with section 10A of the Payments and Settlement Systems Act, 2007. This law, introduced in the last Budget, prohibits banks or system providers from imposing any direct/ indirect charges on those making or receiving digital payments, such as the customer or a merchant. This, therefore, brings MDR to an end, but not the interchange fee.
While some clarity is required as to what constitutes an ‘indirect charge’, the provision itself indicates that the core payments processing has to be kept free of charge for merchants. PSPs, thus, will need to separate the core processing from all other services linked to the payment transaction lifecycle, such as value-added services (VASs), and that is what merchants will be charged for.
There will thus be a shift from the previous value-based, per-transaction fee, to a platform fee. Merchants, in effect, will pay for the quality of service, and tiered services and product bundling will become the norm.i) Tapping into value added services
Innovation and competition have ensured that VASs and quality of service are increasingly a necessity, as opposed to a luxury. This indicates the sustainability of such a pricing system as a revenue model for PSPs. For example, consider settlements, which normally take 2 to 3 days from the transaction date. Instant settlements, however, involve the provision of credit, and are thus separate from the core service of settlement, for which charges can be imposed.
Looking at PSPs today, a number of such opportunities arise with payment management for merchants, such as reconciliation services, faster refunds, effective chargebacks and dispute resolution, dealing with cancellations and issuing credit notes, handling discounts and coupons, etc. Dealing with customers is another area, such as managing transaction risk, effective customer support, identifying delinquent payments and users, etc.ii) Recurring payments and subscription management
Policy moves which enable new innovation are welcome. Take the recently authorized recurring payments on cards and UPI. While the RBI prohibits charging for these, merchants still require support with managing their recurring payments for which charges can be imposed.
Subscription management services, for instance, can automate the periodic recalculations of billing and payments. These can also allow integration with the rest of the merchant’s ecosystem, such as its CRM and ERP processes.iii) Providing digital credit
Credit is another area of strong demand among merchants, and enabling the provision of digital credit, say on UPI handles, is another opportunity.iv) Innovation around APIs, SDKs and custom integration
APIs and SDKs enable innovation and opportunities for revenue. For instance, these allow customized checkout and collection processes for merchants and apps or automated loan disbursals and salary payouts. Another use is to leverage existing payment processing services like customer verification or bank account validation to, say, provide KYC as a third-party service. Sources of friction can also be identified and resolved, such as SDKs for autofill OTPs in apps.
An interesting step by Visa, and one that other payment processors can consider, was to open up its payments processing capability as an API, allowing software developers to directly integrate its payment product with their own products for a charge.v) Data related services
Another area where merchants seek support is with data related services, such as aggregation and analytics equipping them with a holistic view of its finances and deeper metrics as to their services. The scope of PSPs to themselves monetise the data will have to be explored, for instance, payment gateways do not have access to very rich data, thus restricting innovation capabilities. Contractual restrictions on usage as well as the requirements of the upcoming Indian data protection law will also need to be taken into account.
Customer privileges likely to decline
Banks, issuing banks in particular, will be harder hit and will need to take a different route to monetise payments processing. Past experiences with MDR capping, in India or abroad, have indicated that banks recover their revenue through methods like imposition of higher debit card fees (which Section 10A will now not allow), increased minimum account balances and stricter penalties. Cashbacks, loyalty programs and other customer privileges will likely see a decline, given the difficulty for banks, merchants and other PSPs to continue to fund such incentives.
The worst hit
While banks and PSPs can find a way to survive a zero MDR rule, the solutions will primarily benefit larger players with deeper pockets. Small payment service providers, including those involved with core processing alone (consider PoS terminal providers) or those who lack the funding to innovate and discover alternative sources, will not find it so easy.
The worst hit will be small merchants and those in rural areas. Many in the industry have expressed difficulty in continuing to support payments infrastructure for such merchants. The platform service model discussed here does not solve the problem, since VASs will be a luxury small merchants can ill-afford. In the absence of the incentive of MDR, however, providing a basic, no-frills service for such merchants will not be feasible for PSPs. Banks traditionally have demonstrated an inability to service smaller accounts, a gap that was being addressed by PSPs and fintech startups.
Governmental support, along the lines of the now withdrawn MDR reimbursement scheme for payments below Rs.2000/-, is required. The solutions offered so far, such as the proposed mandate to banks to continue to acquire merchants or the setting up of an Acceptance Development Fund fall short.
The first stems from the government’s assumption that the savings on handling cash will be sufficient to make up for the loss of revenue. It is unclear if this is backed by an actual cost analysis, of actual reduction in currency management, also taking into account the costs of digital payments (say cybersecurity).
On the second, the ADF, as per the Nilekani Committee recommendations, is to be funded by 5 basis points from interchange fees. The issue is that zero MDR will lead to zero interchange fees as well. Banks, for instance, have already expressed their reluctance to pay interchange and switching fees on Section 269SU payment modes.
On the policy impact for digital payments
A major advantage of MDR is the incentive it provides to banks to issue and promote cards, to card networks to grow and to banks and non-banks to acquire merchants. The issue with zero MDR is the move from an incentive-based regime to a mandatory, no-profit regime. Such a step does not support competition and innovation. Another example is Fastag, which was mandated, combined with a disincentive to cash payments, long before the actual problems on the ground were sorted out. Instead of leaping into mandates, the government needs to weigh the short and long-term effects of its policy moves, and work with the industry to find solutions.
The author is Head, Fintech Policy at Cashfree; authored with inputs from the Cashfree team.