While fintechs demand a rollback of the Budget proposal to do away with the fee paid by large merchants for accepting digital payments, banks are planning to ask for a detailed framework to implement the same.
A flat rate for merchants of all sizes, reimbursement for merchant discount rate (MDR) revenue forgone and a tax rebate for cashless transactions may be recommended as features for such a framework, people aware of the developments told FE.
In her Budget speech on July 5, finance minister Nirmala Sitharaman had said establishments with annual turnover more than `50 crore shall offer low-cost digital modes of payment, such as BHIM UPI, UPI-QR Code, Aadhaar Pay, debit cards, NEFT and RTGS, to customers and no charges or MDR shall be imposed on customers or merchants.
The proposal, which is now law with the passage of the Finance Bill, comes into effect on November 1.
MDR is a fee paid by merchants to banks for offering them infrastructure to accept digital payments. The amount is then split between the bank that offered the acceptance device (acquirer), the bank whose customer made the payment (issuer) and fintechs or card networks who facilitated the transaction.
Banks are understood to be planning to take up the matter through the Indian Banks’ Association (IBA) with the government as well as the RBI.
Parag Rao, country head for card payment products, merchant acquiring services and marketing, HDFC Bank, told FE that banks are waiting for a mechanism to be evolved through RBI. “There are some talks going on between various industry fora. The ideal framework would be to have a single, flat (pricing) structure across merchants,” Rao said.
A flat structure would mean that irrespective of size, all merchants will shell out MDR at a single rate, with exceptions being made for establishments such as ration shops and government departments. “If you want to take the rate even lower, our recommendation is that you let the government foot the bill for that and say that this may be a temporary measure for two to four years to ensure that adoption of digital happens by merchants,” said one of the people FE spoke to.
Banks would also like the government to continue with the present scheme of waiving MDR on all electronic transactions of up to `2,000 and reimbursing banks and payment companies with the MDR forgone. The scheme is currently scheduled to expire in January 2020.
Bankers may also ask the government and RBI to mandate that some share of a merchant’s turnover be earned through digital means and for all merchants, big and small, to have a digital acceptance device. A Goods and Services Tax (GST) rebate on digital transactions may also be recommended.
So far, banks have been less vocal in criticising the new pricing regulation, widely known as ‘zero MDR’ in the industry, than their fintech counterparts. The new-age payment players have made representations to the government and also written to the RBI, whose officials they expect to meet soon. Naveen Surya, chairman, Fintech Convergence Council, Payments Council of India (PCI), said that the zero-MDR regulation has no rationale because it had never featured in any of the discussions of the Watal and Nilekani committees.
Rather, the conclusion was always that MDR should be market-driven and the only change required is in interchange for acquirers. “The second (objection) is that you already had MDR on transactions up to `2,000 being subsidised by the government and RBI. It anyway covers all merchants, both small and large. Why should merchants with a turnover of over `50 crore, who are established for-profit entities and probably already digitised, get the benefit of zero MDR?” Surya said.
The letter to RBI is understood to have stated that if MDR were to be done away with, the government will be forgoing GST on MDR to the tune of `2,300 crore annually. Besides, the investment climate around payment firms in India will also get a setback. According to Surya, the investment in Indian fintech last year has been $2 billion, of which 70% has come in payments.
Policy uncertainty could scuttle things for the industry.
On the other hand, if the current compensation scheme for small-value transactions were to continue, no further intervention will be necessary, fintechs say. “Our original recommendation was that if you still want to pass on benefits to merchants who are supporting digital payments, you could separately offer a tax benefit of up to 1% directly,” Surya said.