UPI: Zooming Merchant Payments Bring MDR Back On The Discussion Table
An MDR is the fee that a merchant is charged for accepting credit card and debit card payments from customers.
The noise around the rise of Unified Payments Interface has brought the discussions on merchant discount regime back on the table. While a ‘no MDR on UPI’ regime has helped the system grow, its absence has also pained those bearing the associated costs.
"There are no pitfalls of free UPI but the ecosystem is developing. For how long can the government or banks compensate for MDR?" said Mihir Gandhi, partner, payments transformation at PwC India.
The latest monthly data for September shows that the shift from cash to cashless payments has been pivoted by UPI like never before, with the number of transactions crossing 10 billion for the second straight month.
The pinnacle came on the back of a rise in person-to-merchant transactions, which grew faster than person-to-person transactions on a year-on-year basis in the first six months of this calendar year, according to the Worldline India Digital Payments Report.
While merchant payments are still relatively lower value than person-to-person transactions, the pace of volume growth has been significantly higher in 2023.
In absolute terms, the volume of P2M transactions stood at 2,915 crore between January-June, up 119% YoY. The value stood at Rs 19.18 lakh crore, up 72% from the same period last year.
However, the volume of P2P transactions witnessed only a 22% YoY increase to 2,275 crore, and the value grew to Rs 63.99 lakh crore, up 41% from a year ago.
Some of this growth in P2M transactions can be attributed to zero transaction fees imposed on merchants, according to the report.
Another reason could be increased acceptance by merchants, both from in-store and online as they now see UPI as a secure way of payment, according to Sunil Rongala, senior vice president, head of strategy, innovation and analytics at Worldline India.
However, Mandar Agashe, founder and vice chairman of Sarvatra Technologies, said that the P2M transactions are on the rise due to more use cases.
“You can pay your bills, OTT subscriptions, IPOs, and any recurring payments via UPI. It has become so convenient that P2M is naturally bound to grow," he said.
Story Of MDR
An MDR is the fee that a merchant is charged for accepting credit card and debit card payments from customers. This fee is charged by the issuer bank.
In August 2022, the RBI released a discussion paper on regulating various payment system-related charges, including imposition of MDR on UPI transactions. The central bank questioned that if UPI transactions were to be charged, should it be determined by the regulator or market forces.
Since the onset of the Covid-19 pandemic, RuPay debit cards and UPI payments don’t attract an MDR.
In January, the Union Cabinet also approved Rs 2,600 crore worth of incentives for promotion of RuPay debit cards and low-value BHIM-UPI transactions, particularly P2M. Through this scheme, the government was incentivising companies working in a zero-MDR regime.
"There are no direct costs for the government other than the subsidy it now provides to promote digital transactions (and keep the MDR at zero). The total subsidy in FY23 translated to ~7 bps of UPI (P2M) transactions," according to a Bernstein note dated Oct. 3.
Free UPI, But For How Long?
With the UPI ecosystem developing, investments and rising costs—especially for technology—come as naturals.
An MDR on UPI is needed not just because P2M transactions are rising, but it is a general need of the ecosystem where payments need to be compensated, according to Gandhi of PwC India.
"If banks and fintechs are investing so much, someone has to bear the cost. If everything is free, how will it work?" he said.
"The point is that an imposition of MDR will take care of the costs as it will delegate them. People won't stop using UPI as it's very sticky. Since it has now picked up, it is about bringing it to a level where there are more innovations. The government is also compensating these costs from the taxpayer's money," Gandhi said.
A 'nominal' MDR, if imposed on UPI, will not be a reflection of profit but covering running costs for payments business like infra, people and even risk, according to Rongala of Wordline India.
"Increased merchant acceptance is driving all this. The government and the RBI need to take a considered decision as every company can't make losses, they need to be sustainable. If fintechs make profits, it goes back into innovation. So, we need a middle ground on this," he said.
However, the Bernstein note rules out the burden of costs incurred and said that MDR will remain zero for UPI transactions.
"The rationale being that most of the stakeholders have already seen immense benefits (reduced costs or incremental revenue opportunities) that more than compensate the costs that they incur towards facilitating UPI transactions," it said.
A significant beneficiary of this rise in UPI transactions would be banks, that would benefit from lower ATM transactions and help with potential savings that can fund UPI payments, Bernstein analysts said.
While debit card-based ATM transaction volume are about 30% below their peak witnessed in 2019, the per capita withdrawals have also seen a decline from more than seven transactions per card to 4.8 during the same period, the note said.
This also means that banks are saving both on capital and operating expenditure related to ATM transactions, it said.
Even if P2M transactions make 100% of UPI, the derived benefits of a zero MDR regime—such as increase in tax pays, more cash with banks, etc.—justify the costs incurred in a way, according to Deepak Abbot, co-founder, Indiagold.
"And look at the lowering of ATM and currency printing cost—it is substantial enough to fund the entire opex of NPCI," he said. "Maybe at some point an MDR would be there for bigger or organised merchants but right now, there is no merit in changing things as digital transactions are growing and authorities too, want to keep things going."