Five representatives from the digital payment industry reportedly met the officials of the Finance ministry last week and discussed challenges on the removal of merchant discount rate —  charges on digital payments —, according to Economic Times. Citing sources, the report said that the industry is yet to get assurance from the government about the rollback of the measure.

The proposal for withdrawing merchant discount rate was first announced by Finance Minister Nirmala Sitharaman during the Budget 2019. She said that the Payment and Settlement Systems Act, 2007 and Income Tax Act, 1961 will be amended to allow this rule. In her maiden budget speech, Sitharaman 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.

According to the ET sources, several lakh people employed in the sector may lose jobs due to this measure. They also said that this measure may reduce the foreign direct investment in the fintech space. The sources explained that withdrawing merchant discount rate may amount to a loss of Rs 2,000 crore GST. The measure which was introduced to increase the acceptance of digital payments might actually have a negative impact on the government’s goal to achieve 40 billion digital transactions.

The council also highlighted 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.

PCI’s concern about the provision

Following the announcement of the removal of MDR, Payments Council of India had said that the move will eventually lead to the collapse of the payments acquiring industry. According to PCI, the move will “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”. It also further explained that the move will unnerve the foreign investors, who are “already managing some existing policies with great difficulty”.

RBI committee’s recommendation on MDR

An RBI-appointed committee 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.