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No incentives left for banks to push digital pay, fears fintech

While the finer details are still being evaluated, payments firms are looking at fresh business opportunities in the government’s push towards penalising cash payments.

, ET Bureau|
Updated: Jul 08, 2019, 08.08 AM IST
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A clutch of bankers and payment executives ET spoke to raised concerns that overall expansion of digital payments could be directly affected by this move.
Bengaluru: The government’s surprise decision to order banks to stop charging merchants for digital payments might hurt revenue of banks and payment companies make from processing such transactions and thereby discourage new merchant onboarding, according to industry executives.

A clutch of bankers and payment executives ET spoke to raised concerns that overall expansion of digital payments could be directly affected by this move.

“This will hurt payment companies and help large organised retail, and it might hurt overall merchant onboarding strategies for banks,” said a senior banker on the condition of anonymity.

Banks like HDFC Bank, ICICI Bank, State Bank of India and Axis Bank have been leaders in providing card payment facilities to merchants. Merchants pay a fee to these lenders for the digital payment facilities they provide. This is referred to as merchant discount rate in common parlance. Now the government has banned such charges and asked banks to absorb them.

“It is proposed to make a consequential amendment in the Payment and Settlement Systems Act, 2007, so as to provide that no bank or system provider shall impose any charge upon anyone, either directly or indirectly, for using the modes of electronic payment prescribed under section 269SU of the Income-tax Act,” said the budget 2019 memorandum.

Since the changes will be directly made in the PSS Act, which gives powers to the central bank to regulate payments in the country, there will be nothing much that the banking regulator can do with regards to the move, said a founder of a payment processing company.

“We have to read and understand the new section in the Income-tax Act that the finance minister has referred to so that it is clear as to what are the ‘electronic modes’ where there will be no charges at all. As of now, it looks like it includes all debit cards along with UPI and wallets,” he said.

Simultaneously, the government is also mandating installation of UPI payments and QR codes at organised retail, thereby trying to get consumers to start transacting through their smartphones rather than using their cards.

“For small merchants, players like Paytm, Amazon are offering huge incentives. Hence, the government has its eyes set on the organised retail sector. By mandating UPI payments there, it will be interesting to see how it affects the card networks like Visa and Mastercard,” said the person quoted earlier.

However, a top executive at a card payment company said that this is another move to push UPI, but then the finer details of the document are being closely evaluated to understand how it will affect charges on debit card payments.

While the finer details are still being evaluated, payments companies are looking at fresh business opportunities in the government’s push towards penalising cash payments. Startups operating in the business payments space will see wider adoption as construction companies and logistics companies may move to paying their workers digitally to avoid the new government levy.
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