Payment service providers feel the pinch with Zero MDR

Representative Image

V Bhatia

To boost payments through real-time, indigenous systems, Union Finance Minister Nirmala Sitharaman recently announced the exemption of Merchant Discount Rate (MDR) charges on transactions done via UPI and RuPay payment modes. This will be applicable for companies with over INR 50 crore turnover.

Dewang Neralla, CEO, Atom Technologies, a payment solution provider, opines how this will impact the industry.

Q: What is MDR’s bearing on digital payments?

A: MDR is the transaction fee charged by an acquiring bank (bank that has acquired the merchant)/payment service provider to the merchant. It is shared between the acquirer/payment service provider, card issuing bank and the scheme (Visa/Master/Rupay), with a lion’s share going to the card issuing bank.

Q: How does the zero MDR rule impact other payment services like Paytm or Atom Technologies?

A: Many payment service providers and acquiring banks depend on MDR as their only revenue source. This definitely affects their revenue and their ability to invest to grow the market further, unless they have deep pockets.

Q: When the government suggested a no-MDR charge system in July 2019, the Payment Council of India criticized it saying that it would lead to the whole digital payment industry without any business and revenue model. Do you agree?

A: Any zero-pricing regime significantly impacts industry players unless and until they have a parallel source of revenue. They will only burn capital to sustain and survive over long periods of time. Since many depend on MDR as a revenue source, this move hurts the entire business model, especially in light of the overall foreign investments attracted to the Fintech sector. However, this impact could get mitigated if banks compensate for the loss, as the Finance Minister said in her budget speech.

Q: Can the zero charges on digital transactions affect acquisition of new merchants?

A: Today, Rupay and UPI constitute a large part of the transactions in terms of the market share, which has been growing consistently. Any transaction processing is a cost - be it cost of technology, manpower for processing, deployment or signup. What is the motivation for any business to invest in growing the market in absence of revenue and by only bearing cost?

Q: Will the zero MDR move boost digital payments?

A: There is a cost for customer acquisition. How that is funded depends on the company. Some fund it through their revenues, others by raising capital. Frankly, transaction charges themselves don’t make any difference to merchants in terms of the cost since the charges were much lesser. For example, traditionally, debit cards were charged 0.4 percent for transactions below INR 2000 and 0.9 percent for transactions over INR 2000 with a maximum cap. Most debit card transactions in the past two years were below INR 2000, which was already free to merchants.