The government will spend up to Rs 1,500 crore in the coming year to incentivise digital payments adoption in the country, Finance Minister Nirmala Sitharaman announced as part of the Union Budget Speech for 2021-22. Sitharaman also said that the government will establish a Fintech hub at the International Financial Services Centre in Gift City, Gujarat.
“There has been a manifold increase in digital payments in the recent past. To give a further boost to digital transactions, I earmark Rs 1,500 crore for a proposed scheme that will provide financial incentive to promote digital modes of payment,” she said.
Last year, the government removed the merchant-discount-rate (MDR) on Unified Payments Interface (UPI) and RuPay debit card transactions for businesses with a turnover of over Rs 50 crore. MDR is the fee paid to banks and payment service providers by merchants, typically around 1.5-2% the transaction value. This led to payment companies and apps, that provide UPI payments services, bearing the cost of processing transactions and physical infrastructure expansion as it could not be passed onto consumers or merchants.
Over time the MDR for digital payments, debit card and credit card transactions has been reducing through the government or the Reserve Bank of India’s measures. While the government’s decision that businesses could not levy MDR on UPI and RuPay cards did not spoil the rush of new users towards digital payment apps and platforms in the last year, be it consumers or merchants, payment companies have continued to burn cash on growing their network. Without a revenue or incentive structure on consumer payments, many have turned to lending or a wide ambit of financial services products.
The Finance Minister did not elaborate on whether this scheme will have a new structure or if it will follow the same structure as under the previous MDR reimbursement scheme of the Ministry of Electronics and Information Technology (MEITY). Under the scheme, banks were compensated based on digital payments adoption scorecard. As the ministry reimbursed banks based on how well they performed, third party UPI players who sat on top of the banking network would receive their share for doing their part in growing the digital payments pie.
According to the Budget documents, MEITY has been allocated a total of Rs 1,500 crore for 2021-22 compared to a revised budget of Rs 300 crore in 2020-21. In 2019-20, the ministry’s actual expenditure towards promoting digital payments stood at Rs 511 crore. The ministry currency has run several schemes under its digital payments initiative, including Aadhaar-based Payments, a cashback scheme for merchants, referral bonus scheme, in addition to exemptions for the Ministry of Railways and others.
Industry reacts with cautious optimism
“Small retailers and kiranas were instrumental in growing the share of digital payments in India and in providing easy payment solutions to their customers since the onset of COVID 19. The budget provision of Rs 1500 crore to incentivize digital modes of payments comes as a recognition of these very efforts and will go a long way in encouraging Small and Medium Enterprises (SMEs) to switch to accepting digital payments,” said Manish Patel, founder and chief executive officer, MSwipe.
“The CoVID induced habit around digital payments will have to be sustained by policy measures that will allow opening up of new sectors like transit, parking and others. There are interesting startup’s that are doing meaningful work, the funds can be put to good use in some of those use cases.The fund should also be utilised for absorbing some of the capex required in deployment of physical Point-of-Sale machines,” said Madhusudanan R, co-founder of fintech SaaS player YAP.
The announcements made by the Finance Minister towards the further development of digital payments in India, as part of the Union Budget 2021 are indeed positive, said Akash Gehani, co-founder and chief operating offer, Instamojo. “In fact, the allocation of Rs 1500 crore for digital payments is a welcome move, but it is too early to comment on the same. What we should be looking forward to is the implementation of the same. While the funds have been announced it is still unclear how this budget allocation is going to be used for the benefit.”
Harshil Mathur, co-founder and CEO, Razorpay, said that with digital payments growing by 80% in 2020 from Tier-2 and 3 cities, the government is focused on capitalising on this momentum and the scheme can open a plethora of opportunities for payents adoption in the smallest of towns and villages. “I’m hoping the funds will be used towards developing alternatives to the Zero-MDR policy and initiatives towards bringing digital financial literacy in vernacular languages. These will instill trust in the system and accelerate adoption from MSMEs and entrepreneurs who are apprehensive towards moving money digitally,” he said.