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No one saw zero MDR for digital payments coming

In the RBI's vision document for 2021, the central bank said it would consider shifting from transaction value-based pricing slabs to a fixed minimum transaction-based pricing.

, ET Bureau|
Updated: Jul 11, 2019, 09.46 AM IST
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Some industry players believe that the budget proposal may aid them in expanding operations rapidly and help banks get more current accounts.
Bengaluru: Over the last few years, at least two expert panels on digital payments have suggested a market-linked pricing structure for merchant digital payments, with none suggesting merchant discount rate (MDR) to be brought down to zero, as the government proposed in the budget last week, according to industry insiders and an ET analysis.

After the government withdrew ₹1,000 and ₹500 denomination currency notes from circulation in November 2016, multiple committees on digital payments have been formed, consisting of industry and policy experts. These include the Ratan Watal and the Nandan Nilekani-led committees.

“This goes fully against the digital payments agenda of the government. There seems to be something completely amiss; usually government, policy makers and regulators are always aligned on key issues and principles,” said Naveen Surya, chairman of the Fintech Convergence Council, an industry body for fintech companies.

After analysing the recommendations of these committees, ET has pieced together the major issues faced by the industry and possible solutions.

“MDR is crucial for acquisition of new merchants, it should be high enough for new players to be incentivised to enter the space and low enough that merchants are encouraged to adopt digital payments,” according to the report by the Watal committee, constituted in December 2016 by the finance ministry. It further suggested that MDR should be market-driven, with minimum government intervention.

Similarly, the Nilekani-led committee, which was constituted by the Reserve Bank of India to suggest ways of deepening digital payments, has suggested minimal government intervention in the payments business.

It has also suggested that the government should absorb the MDR to promote digital payments among merchants.

“I think the confusion is around reducing the issuers’ share of the interchange fee, which will reduce the overall MDR,” said Loney Antony, vice chairman, Hitachi Payments. “As of now, issuers get around 75% of the share of MDR by just giving out cards to bank customers. This was highlighted by the Nilekani committee as well.”

The Nilekani committee pointed out that the interchange fee should be reduced by 15 basis points (0.15%) and an additional five basis points should be parked in an acquirer development fund by issuers to give incentives for businesses to adopt digital payments and make it attractive for payment companies to onboard merchants.

In the RBI’s vision document for 2021, the central bank said it would consider shifting from transaction value-based pricing slabs to a fixed minimum transaction-based pricing, mainly towards recovery of marginal costs and to migrate to a low margin-high volume regime.

Some industry players, however, believe that the budget proposal may aid them in expanding operations rapidly and help banks get more current accounts.

If more merchants start adopting digital payments, it will be good for the overall ecosystem, said Rajeev Agrawal, CEO, Innoviti Payments.

Also Read

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MDR boost for merchants using UPI

Payment companies seek better MDR deal

View: Abolishing MDR charges is not a great idea

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