View: Abolishing MDR charges is not a great idea
To do away with MDR altogether is to cut the purse-strings which fund both existing activities and the impetus for future innovation.
The problem with knee-jerk reactions is that they seldom achieve what they set out to do in the first place. Invariably, one leads to another, ad infinitum, ad nauseam, ad pauperum. Such is the case with core decisions with regards to the government’s bid to convert India into a digital economy.
After demonetisation, the Narendra Modi government relied heavily on payment companies to bring the rest of India, kicking and screaming, out of the womb of cash into the digital world. But it obviously thought they weren’t working fast enough.
After a number of announcements, including a volte-face on the reintroduction of e-KYC and a zealous sponsorship of QR (quick response) codes, GoI has now gone one step further and announced in Budget 2019 that there will be no fees — merchant discount rate (MDR) — for cashless transactions for businesses with a turnover greater than Rs 50 crore.
Finance minister Nirmala Sitharaman justified this on the grounds that “RBI and banks will absorb these costs from the savings that will accrue to them on account of handling less cash.”
A government that believes a cashless transformation can be achieved by denying the costs inherent in creating and maintaining the vision it has set for itself, must be cautioned.
First, because it’s not only banks that enable cashless transactions. An army of functionaries and specialists makes credit card transactions at points of sale (PoS) or online transactions take place seamlessly. These may include issuing banks, acquiring banks, merchant acquiring firms, PoS companies that instal card readers, payment gateways, payment networks, and any other technology or payment service provider that combine all or some of these functions, and make the payment system robust to use.
Over the years, each aspect of a digital transaction has become specialised, with smaller companies growing more adept, agile and economical than their larger bank counterparts at supporting critical functions — from initiation and authorisation, to final clearance and settlement. To do away with MDR altogether is to cut the purse-strings — comprising only a few pennies, anyway — which fund both existing activities and the impetus for future innovation.
Second, the government should really focus on reshaping payment system economics by facilitating choice, rather than trying to control the cost of proliferation of infrastructure. The most significant component of MDR is bank interchange, comprising up to 75% of all MDR, depending on whether the funding instrument is a debit or a credit card.
And while it is true that merchant acquirers set MDR (accounting for all costs, including interchange, to create a bended rate), it is the payment networks that set interchange.
If GoI truly believes that MDR is the last hurdle to cross before driving ubiquitous digital payment acceptance, then they should find a way to get payment networks to cooperate.
The government has RuPay, a network that can easily price bank interchange and other associated costs competitively. Couple this with a rule that forces every bank to carry two network marks on all Indian issued credit and debit cards (one of which must be RuPay), and you have a payment system that will automatically self-regulate its costs without ruinously impacting the other players in the ecosystem.
If the other payment networks (Mastercard, Visa, American Express, etc) do not comply, the merchant can always steer the payment to the lower-priced network system and, therefore, keep the system humming.
There are three things the government should keep in mind as it builds out its vision.
The first is reliability. Russia’s experience in 2014, when payment networks like Mastercard and Visa stopped servicing bank cards after the US-imposed sanctions, provides a cautionary tale that cannot stress the importance of an indigenous network like RuPay enough.
The second is security. This is a graph of constant improvement that blends technology with convenience, and can only be made possible if its practitioners — the payment ecosystem players — earn enough to employ the right talent.
Finally, affordability. Choice supports the aim of this tenet where zero fees ignore the needs of the system. And the free ride may not be worth the effort, after all. The writer is former head, partnerships and Citi merchant service, Citibank, US