Finance Minister’s Nirmala Sitharaman’s announcement that Merchant Discount Rate (MDR) charges for businesses with over INR 50 crore annual revenues will be waived off from January 1, 2020 has been met with mixed response.
She said that digital transactions made using RuPay credit cards, or UPI QR codes will not face additional charges for merchants or customers from 2020.
MDR is the percentage of the digital transaction that a merchant pays to banks, which is often borne by the customer. By making RuPay and UPI as the preferred digital payment mode and exempting it from this charge, the Finance Ministry hopes that these indigenous entities will gain prominence in a cashless economy.
The Department of Revenue will soon notify RuPay and UPI as the prescribed mode of payment for digital transactions without any MDR, she added, after meeting with public sector bankers. This means that low cost digital payment modes like BHIM UPI, UPI QR Code, Aadhaar Pay, etc, will be exempted from MDR charges, making them more viable to global payment facilitators like Visa, Mastercard and AMEX.
SME companies and small merchants, especially in rural areas, expect this move to boost digital payments, where credit card payments are limited. At the same time, since mid- and large-sized businesses can make payments via digital modes, it will make their transactions more transparent.
However, privately-held payment service providers are unsure about the fallout of this announcement. According to one industry expert, by giving preference to indigenous players, the government is doing disservice to other service providers in the digital payment ecosystem.
On conditions of anonymity, he said, “Private payment service providers invest heavily in fintech solutions that will benefit the Indian population and promote financial inclusion. The zero MDR will obliterate the business and they will lack any incentive to maintain the infrastructure they build, especially in this tough economic environment."
Another industry expert pointed out that the government believes getting rid of MDR would mean that merchants would prefer digital payment modes over cash payment. “However, who will pay for user acquisition incurred by payment facilitators? Will homegrown payment service providers and Visa and Mastercard now focus on different audiences?” he questioned.
It is also unclear how this new notification will impact smaller establishments like retailers, restauranteurs, jewellers, etc, who often ask customers to pay 1-2 percent transaction fees on the total sale amount if they make a card payment. Since they do not fall under the INR 50 crore bracket, they need not provide digital payment facility. Nonetheless, they still offer this facility because their customers expect it. As always, the devil lies in the details and this is still awaited from the FinMin.