The Payments Council of India has raised concerns over the budget proposal to levy zero MDR (merchant discount rate) on merchants, saying it will eventually lead to the collapse of the payments acquiring industry. In her maiden budget speech last week, Finance Minister Nirmala Sitharaman had said that all businesses with an annual turnover of more than ₹50 crore will have to offer digital payment modes, and that such merchants will not be charged MDR, which is typically around 1.5-2%. She said that the RBI and banks would bear this cost “from the savings that will accrue to them on account of handling less cash”. Prior to the budget announcement, the government was subsidising MDR on low-value digital transactions, that is, ₹2,000 or under.

In a statement (see below) on July 9, PCI said that the announcement would “deflate the hard work done by the acquiring industry, and MDR, if not charged to the customers and merchants, should be borne by the government. This will help the acquirers invest in the expansion of the acquiring infrastructure”. Terming it a “knee-jerk” policy change, PCI said it was also likely to spook foreign investors, who are “already managing some existing policies with great difficulty”.

Loney Antony, co-Chairman, Payments Council of India, and Vice-Chairman, Hitachi Payments said, “Non-bank payment service providers (PSPs) like aggregators/processors are a significant part of the ecosystem. If there is no commercial model, they will be forced to shut down. Banks may have multiple ways to recover money from the merchants, but non-bank players do not have any other avenue than the MDR. These PSPs are employing at least over a several lakh jobs [sic], and in the absence of revenue, there will be survival issues and the industry will eventually collapse.”

Deepak Chandnani, CEO, South Asia and ME, Worldline, said that with banks being asked to bear the burden of zero MDR, the profitability of their acquiring business would be affected. Further, he added, it is likely that banks would try to recover some of this from their non-bank fintech partners, thus having a negative impact on all the players in the ecosystem.

PCI also said that none of the recent reports on digital payments, including the one by an RBI-appointed committee headed by Nandan Nilekani and the 2017 Watal Committee report, had recommended zero MDR. It also referenced the recent RBI Vision 2019-21 document, which recommends creating additional efficiencies in costs and not eliminating MDR.

What RBI-appointed panel said about MDR

An RBI-appointed panel set up to review the status of digital payments in January had submitted its report in June 2019. Here’s what it said about MDR fees:

Recommendation 3: Fix interchange fees on card networks. The regulator must intervene regularly to fine-tune interchange fees and address other related issues to ensure a level playing field in the market for both the issuer and the acquirer. Market determination of MDR and interchange fees isn’t working. To correct this:

  • The Interchange on card payments may be reduced by 15 basis points (0.15%) to increase the incentive for acquirers to sign up merchants.
  • The RBI may set up a standing committee to review the MDR and interchange periodically to ensure growth.