The Re-Beginnan | Vol.2 | Issue 26
Current Scenario in a Gist…
UPI (Unified Payment Interface) was introduced by the National Payments Corporation of India (NPCI) in 2016, to facilitate digital transactions and move India towards a cashless economy. UPI has caught a lot of traction since 2016 and has been accepted widely. To further increase the acceptance of UPI in December 2019, the government withdrew MDR (Merchant Discount Rate) charges applicable on payment via UPI.
Recently, in November NCPI announced a 30 per cent cap on all third-party UPI payment apps i.e. no UPI player could have more than 30 per cent market share.
What are MDR Charges?
MDR is a fee charged for payment processing services from a merchant on debit/credit card transaction or a UPI transaction. MDR is usually between 1 to 3 per cent.
Why were MDR Charges Important for UPI Platforms?
Why were MDR Charges Important for UPI Platforms?
- MDR charges were important as that is how UPI platforms would make profits. Revenues of UPI companies are now in a soup.
- UPI start-ups in India feel discouraged as without MDR their survival has become difficult.
- Foreign companies with deep pockets like Google Pay (Owned by Google) and Phone Pe (Owned by Walmart) have acquired the majority of the market share (Over 80% of UPI transactions) as start-ups became handicapped due to no MDR and lack of huge funding.
- Mega foreign companies offer massive discounts and cashbacks without even looking at the revenue deadlock and negative profit margins while Indian start-ups struggle to survive.
- BHIM app that was introduced by the government, saw a dip in its market share going down to 12 per cent in 2019 from 34 per cent in 2018.
- Finance Minister Nirmala Sitharaman, justified the removal of MDR by saying “RBI and banks will absorb these costs from the savings that will accrue to them on account of handling less cash as people move to digital modes of payment”. However, till now this claim has not been backed with any substance.
- The Watal Committee in 2016 and Nilekani Committee in 2019 both recommended against zero MDR. In fact, Nilekani Committee said that India should let UPI companies compete on the merit of their product rather than force adoption.
- According to market players “The UPI business has been reduced to whoever has the money is buying the consumers.”
- Zero MDR has led to poor after-sales service of the UPI platforms as no company is ready to invest in product experience and after-sales service.
- Banks have lost interest in UPI too, and are not giving any offers or encouraging their customers to use their UPI apps as there is no upside in the scaling of UPI.
What is the Government Missing?
- MDR must be charged but it should be low enough that merchants adopt the payment method, and encourage customers to use such payment methods and high enough to cover costs and incentivise issuers and acquirers.
- The government lacks a road-map and a long-term vision. In countries like the US, the regulators have been pro-innovators and pro-business.
- Lack of long-term policy around payment innovation and infrastructure to ensure return on capital.
Closing Note…
The market cap of 30 per cent on all third-party UPI apps has been done with an aim to promote the BHIM app (Government’s app) and other Indian UPI platforms. But the question is — Is this a correct approach to promote home-grown businesses? Or Should the government focus on innovation and long-term policies?.
