The clarification comes amid a fresh debate on MDR for digital payments. PCI said the industry has made significant investments to expand payments infrastructure and requires a fee mechanism to sustain the ecosystem.
“MDR is not to create a profit pool for players,” PCI said, adding that the proposed charge is the “bare minimum” needed to maintain and grow the digital payments network.
Speaking to CNBC-TV18, Patel said the new charges would help payment companies and banks recover part of the costs incurred in building and maintaining India’s digital payments infrastructure.
The National Payments Corporation of India (NPCI) has announced that a merchant discount rate of up to 0.4% will apply to certain person-to-merchant (P2M) UPI transactions above ₹2,000, with the fee capped at ₹300 per transaction. The new framework will come into effect on October 15.
This is an edited transcript of the interview.
Q: There have been many safeguards that have been put in place to ensure that a large majority of the UPI ecosystem is not impacted by way of the caps that have been put in by the NPCI – no platform fee, and so on and so forth. But if I may ask you to start with, how did you arrive at this 0.4% number, Vishwas, and how do you respond to the criticism that this is nothing but another tax?
A: First you have to understand who is paying. Consumers are not paying anything. What changes for them? Nothing. It’s zero. Any consumer paying through UPI, please remove the myth that they will be paying anything, any MDR? No. Consumers are not paying for anything, whether they transfer P2P, another money, or they pay to any merchants, they are not paying anything. For crores of users who are using UPI, there is zero. You don’t have to pay anything more than what you are paying for the product as till now.
As far as merchant transactions is concerned, 95% of the transactions are below ₹2,000. Those are still will be free, which we as a fintech ecosystem along with the banks will be processing it for free. So that whole load of this crores of transactions and processing them will still be free for 95% of the transactions. If you look at RuPay also, now RuPay there are 800 million RuPay cards. They continue to remain free, the RuPay debit card – we will be processing them for free, be it online, offline, and there’s a huge cost. Huge cost of growing this acquiring base. So you are not paying, the consumers are not paying, 95% of the transactions the merchants are not paying.
The small merchant, person-to-person-merchant (P2PM), that is less than one lakh rupees per month what they do, it’s free for them also. And most of the major category, be it utility bill payments or fuel or stock market, it’s very limited to ₹5 charge per transaction, even if you are transferring lakhs of rupees in a single transaction. So those all remain free.
Q: Could you clarify how consumers will remain protected and why merchants will not pass on the 40 basis points of MDR to customers?
A: So essentially, it will be the networks and the banks. The network have very clearly told the banks – the acquiring banks, have to ensure that the consumers are not charged. Now the full responsibility will come on to the banks, acquiring banks, and us as payment aggregators to ensure that our merchants don’t pass it on to the customers.
But the responsibility has been very clearly carved out by NPCI in their letter in the steering committee meeting.
Q: Let’s look at the economics of the new framework. Transactions above ₹2,000 account for only a small share of overall UPI volumes. Does the industry break even under this arrangement? You had earlier mentioned a cost of ₹20,000 crore. How will the economics work for fintech companies and banks, and how will the 40 basis points be distributed among the various participants?
A: This is not money for growth or profit. This money is just to sustain the ecosystem.
You should remember that for six years, we have been processing debit card and UPI transactions for free. If you look at our members’ balance sheets, there is a hole of almost $5 billion that has emerged from the effort to make UPI happen in the country.
We have spent a lot to grow the ecosystem, and we need this limited revenue to sustain it. Still, out of this, we are taking out five basis points and creating a ₹700 crore fund every year to help expand digital payment acceptance among street vendors, in the Northeast and in Jammu and Kashmir.
The aim is to increase the acquiring base and bring small kirana stores and other businesses onto the digital payments network. Once they join the digital payments ecosystem, they can gain access to other services, including credit.
This money is the bare minimum to help us sustain the ecosystem and support some merchant acquisition. The five basis points from the charges on transactions above ₹2,000 will be put into the fund to bring in more small merchants.
We also have to grow the POS infrastructure to support credit, debit and UPI payments. Today, India has only 30% POS coverage across merchants. Brazil and China, by comparison, have around 90% coverage.
We are only at 30%, but we are processing half of the world’s real-time transactions. If we have the resources to expand POS infrastructure, grow UPI and bring small kirana stores, farmers and other merchants onto the digital payments network, it will be good for the country.
Q: You mentioned a $5 billion funding gap. Could you explain what that means? You also said the new MDR revenue would be enough to sustain the ecosystem, rather than drive growth. Some industry participants, however, believe it could create significant growth opportunities. The stock market is also looking at the potential impact on valuations. Could you explain the funding gap and give us an estimate of the revenue involved?
A: The losses incurred by our members over the last five to six years are well known. Players like PhonePe and other companies have incurred these losses primarily to grow the UPI base in the country.
It was not the banks that made customers switch to UPI and adopt it. Our members and merchants did the hard work of going into the hinterland and bringing consumers onto the UPI network through cashback programmes and other initiatives.
It is a costly exercise. A single KYC process for a merchant in a rural area costs us ₹350–₹400. We may have to visit the same merchant five or six times to complete the full KYC process as required under RBI norms.
There is a cost involved in expanding the base. If we continue to have a minimum sustainable amount of revenue coming in after six years of processing crores of UPI and RuPay debit card transactions, it will help us sustain the ecosystem.
Q: Could you give us an estimate of the revenue the MDR regime could generate, considering it affects only a small share of the overall UPI ecosystem? What is the figure after setting aside the ₹700 crore fund?
A: Based on current estimates, around ₹15,000 crore should come in, based on the current transaction volumes and excluding additional growth.
Out of this ₹15,000 crore, we are putting ₹700 crore towards expanding digital payment acceptance. This revenue will also be distributed among three or four parties, including issuing banks, acquiring banks, payment aggregators, TPAPs and payment system operators.
There are several costs involved in building scale. We have to look at fraud prevention, penetration, security, KYC and other challenges. With zero MDR and zero earnings until now, how long could we have sustained the ecosystem?
Q: The estimate is around ₹15,000 crore based on current volumes. Could you give us an indication of how the revenue is likely to be split among banks, payment aggregators and companies such as PhonePe?
A: I believe issuing banks will receive a substantial portion. Issuing banks and acquiring banks will have an equal share. TPAPs will receive around half of what an issuing or acquiring bank gets.
The split could be around 40%, 40% and 20%, although I don’t have the exact distribution at this stage.
Issuing banks could receive 40%, while acquiring banks and TPAPs together could receive around 50%.
Q: There are concerns about the impact of MDR on consumers. Some people are even asking whether they should go back to using debit cards or cash. How do you respond to these concerns? Will the industry conduct an outreach programme to explain the new framework? And how will you ensure that merchants do not pass the charge on to customers?
A: Enforcement can happen very easily. There are penalties, blacklisting and other measures that can remove a merchant from the ecosystem. UPI is such a force multiplier that merchants cannot afford to stop offering it to customers if they want to remain relevant in the market.
There are procedures, rules and bylaws that require acquiring banks and payment aggregators to ensure that merchants do not pass on the charge.
For higher-value transactions, such as insurance payments, bill payments, gas, fuel and stock market transactions, the charge is a flat fee of ₹5 or less. The 40 basis points is also an upper limit, and merchants may negotiate lower rates in the future.
Overall, 95% of transactions below ₹2,000 will remain free. P2PM transactions up to ₹1 lakh a month will also remain free, and all P2P transactions will continue to be free.
The impact is limited, but this small amount of revenue will go a long way towards helping us sustain and grow the ecosystem.
There are still many people who do not have access to UPI infrastructure. We need to bring them into the digital payments network, whether as users or small merchants.
This effort will involve reaching small businesses in villages and remote areas, supporting them, training them and helping them adopt digital payments. Once they join the network, they may also gain access to credit.
There is a great deal of work ahead. We need some faith in the industry. This revenue is not intended to make companies’ valuations rise significantly. It is meant to help sustain the ecosystem, support small merchants and expand digital payments across the country.
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