Reassessing the Zero MDR Policy: Payments Council of India's Appeal to the Prime Minister

 

The Payments Council of India (PCI), representing approximately 180 non-banking payment industry players, has formally appealed to Prime Minister Narendra Modi to reconsider the Zero Merchant Discount Rate (MDR) policy implemented in January 2020 for Unified Payments Interface (UPI) and RuPay debit card transactions. The council underscores the financial strains this policy imposes on the sustainability and growth of India's digital payments ecosystem. 

Background of the Zero MDR Policy

The Zero MDR policy was introduced to promote digital transactions by eliminating the fees that merchants typically pay to banks and payment service providers for processing payments. While this initiative aimed to encourage digital adoption among merchants and consumers, it inadvertently placed the financial burden of maintaining and expanding payment infrastructures solely on the service providers.

Financial Implications Highlighted by PCI

In its letter, PCI acknowledges the government's efforts to offset some operational costs by allocating financial incentives. However, the council points out that the Rs 1,500 crore provided covers only a fraction of the estimated Rs 10,000 crore required annually to sustain and enhance UPI services. This significant shortfall hampers the ability of payment service providers to invest in critical areas such as innovation, cybersecurity, merchant onboarding, compliance, and IT infrastructure. 

Proposed Recommendations by PCI

To address these financial challenges, PCI proposes:

1. Introduction of MDR for RuPay Debit Cards: Implementing a nominal MDR on all RuPay debit card transactions to align with the fee structures of other payment modes.

2. Reasonable MDR for UPI Transactions by Large Merchants: Establishing an MDR of 0.3% for UPI transactions conducted by large merchants, defined as those with an annual turnover exceeding Rs 40 lakh. This rate is consistent with existing MDR structures for credit cards (approximately 2%) and non-RuPay debit cards (around 0.9%). 

PCI assures that implementing these changes would not disrupt operations, as large merchants are already accustomed to MDR on other payment methods. The council emphasizes that such measures are crucial for ensuring the long-term financial sustainability of the digital payments ecosystem.

Government's Stance and Recent Developments

The government's commitment to promoting digital payments is evident in its recent approval of a Rs 1,500 crore incentive aimed at encouraging small-value BHIM-UPI transactions up to Rs 2,000. This initiative seeks to benefit common people and small merchants by facilitating low-value digital transactions. 

However, PCI argues that while such incentives are beneficial, they are insufficient to cover the substantial costs associated with maintaining and expanding the digital payments infrastructure. The council advocates for a more sustainable model that includes nominal MDR charges to ensure continuous investment and innovation in the sector.

Impact on the Digital Payments Ecosystem

The Zero MDR policy has led to several challenges within the digital payments landscape:

• Revenue Constraints for Service Providers: Without MDR income, payment service providers face financial constraints that limit their ability to invest in technological advancements and infrastructure improvements.

• Sustainability Concerns: The lack of a steady revenue stream raises questions about the long-term viability of digital payment platforms, especially as transaction volumes continue to grow.

• Innovation Stagnation: Reduced financial resources hinder the development of new features and services that could enhance user experience and security in digital transactions.

Comparative Analysis with Other Payment Modes

It's noteworthy that other digital payment methods, such as credit cards and non-RuPay debit cards, continue to operate with MDR charges. Credit card transactions typically incur an MDR of around 2%, while non-RuPay debit cards have MDR rates ranging from 0.75% to 0.9%. This disparity creates an uneven playing field and may discourage service providers from prioritizing UPI and RuPay transactions due to lower or nonexistent revenue potential.

PCI's Call for Collaborative Dialogue

PCI seeks the Prime Minister's personal intervention and requests an opportunity to present its case in greater detail. The council reaffirms its commitment to collaborating with the government and regulators to strengthen India's digital payments ecosystem while ensuring its financial sustainability. 

Conclusion

The appeal from the Payments Council of India brings to light the critical need to reassess the Zero MDR policy to balance the promotion of digital payments with the financial health of service providers. Implementing nominal MDR charges, particularly for large merchants, could provide the necessary funds to sustain and enhance India's digital payment infrastructure. As the government continues to champion digital initiatives, a collaborative approach that addresses the concerns of all stakeholders will be essential to ensure the long-term success and sustainability of digital payments in the country.