Did India just kill its payments industry?


In a shock decision last December, Indian finance minister Nirmala Sitharaman announced that domestic payment platforms RuPay and unified payments interface (UPI) — both of which were developed under the direction of the National Payments Corporation of India — would not levy merchant discount rate (MDR) charges on transactions.

An MDR charge is the fee that a merchant pays to the payment provider for every transaction processed which is generally split between three parties: the issuing bank, the payment platform and the acquiring bank. The abolition of these fees applies to businesses with a turnover above ₹10 million. The government intends to promote financial inclusion, with banks and payment providers absorbing transaction costs rather than passing them to consumers, particularly less affluent consumers.

The reaction from the industry has been one of astonishment. “A zero MDR will kill the industry and will leave no incentive to expand the [Indian online payments] universe,” Dewang Neralla, the CEO of Atom Technologies, told the financial website LiveMint [1]. Paytm founder and CEO Vijay Shekhar Sharma said “While I am on the side of MDR becoming zero being a good thing for the merchant, the government should reimburse people who are acquiring merchants.” [2]

India has been seen as a trailblazer in developing standards-based digital payments. The UPI is an instant real-time payments system operated by the National Payments Corporation of India and used by 143 of the country’s banks [3]. Banks can either use the system without modification or use it as the basis for developing their own payments system with value-added features [4]. By the end of 2019, Indian consumers were making 7 billion transactions a year on the UPI platform [5].

RuPay is a domestic payment-card scheme designed to offer lower transaction charges than global competitors. Like the UPI, RuPay is part of the Indian government’s drive to end financial exclusion and ensure that non-cash payment methods are available to all Indian citizens, regardless of their income level.

Abolishing MDR on both platforms is also part of this drive to financial inclusion. But while it should help to make the platforms cheaper for merchants to use, and prevent costs being passed on to consumers, ending these payments could deter banks and other financial institutions from investing time, money and resources into developing payment products based on the UPI and RuPay.

Echoing the CEO of Atom Technologies, Vishwas Patel Chairman of the Payments Council of India told the website YourStory that, “the zero MDR on RuPay and the UPI will kill the industry and make the business model unviable. It’s like the nationalisation of the payments industry. If the government wants to drive digitisation, then it should bear the cost.”

For banks and fintechs, being unable to charge merchants for every transaction complicates the job of building business models around these payment platforms. It risks introducing a disincentive to invest in these platforms. This could have two outcomes, neither of which the government of India intends. The first is simply to slow the uptake of digital payment methods. The second is to incentivise banks and payment providers to build products based on platforms other than RuPay or the UPI.

“This is an extremely interesting time for the payments industry in India, a priority market for PPRO in 2020 as we add access to local payment services on our network,”

said Tristan Chiappini, PPRO’s VP of Partnerships in APAC. “With billions invested in them and government support, neither the UPI nor RuPay is going away any time soon. But will this decision help or hinder the uptake of the platforms? That remains to be seen. Entrants into the Indian payment and e-commerce markets will also have to monitor the situation, to see what impact this decision has on Indian consumers’ payment preferences. This demonstrates yet again the complexity of local payments and the importance of having a partner who truly understands the payment landscape in each market.”