The Reserve Bank of India’s (RBI) payments vision document for 2025 has brought the focus back to the question of reviving the merchant discount rate (MDR) on Unified Payments Interface (UPI) transactions, as the central bank introduces an enablement to link credit cards to UPI.
While the vision document makes no specific mention of MDR, it does state that the RBI is undertaking a review of charges within the payments ecosystem. It acknowledges that providing digital payment services entail costs, which are borne by one or more of the payment system participants as switching fees, interchange fees and so on, or are passed on to the merchant as MDR or to the customer.
“While collecting charges from the merchants and / or customers may be required for viability of digital payments, care needs to be taken to ensure that they are reasonable and do not deter digital payments adoption. A comprehensive review of all aspects related to charges involved in various channels of digital payments shall be undertaken,” the document said.
Analysts at Emkay Global Financial Services said in a report on Monday that this review could result in relatively higher credit card and wallet MDRs and the introduction of MDR on UPI to at least cover the cost.
“We believe linking credit cards to UPI is positive for spends growth, but without MDR, its acceptance in non-Rupay cards will be limited. Moreover, the reduction in MDR to improve affordability could be negative for card/wallet companies (SBI Card, Paytm),” Emkay said.
One of the goalposts proposed in the vision document is that debit card usage should surpass credit cards in terms of value by 2025. Such a plan to promote debit card usage could pose a risk to a monoline credit card company like SBI Card, Emkay said.
Earlier, RBI officials have said that the pricing structure for credit on UPI will be evolved at a later stage. Deputy governor T Rabi Sankar has said that the basic objective of linking credit cards to UPI is to provide the customer a wider choice of payments. “How the pricing of that will work out, we will have to see because pricing is something that the banks and the system entities will have to do. At this point, we will introduce the arrangement,” he said.
The government had waived MDR on UPI and RuPay debit cards from January 2020 to push the adoption of digital payments by small merchants. Soon after the RBI announced the plan to link UPI to credit cards, sector watchers pointed out that the success of UPI has been largely due to the convenience and low costs associated with it.
A June 8 report by Kotak Institutional Equities (KIE) said, “We don’t want to be optimistic on this development as the success of UPI has been its convenience on consumer side and high confidence to accept at the merchant side. This is likely to change when a credit transaction is proposed that has an MDR.”
RBI’s latest vision document counted the lowering of transaction costs among the goalposts that were achieved after being first outlined in the vision document for 2019-21. It listed the waiver of charges levied by the RBI for transactions processed in the Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT) systems, waiver of charges for savings bank account customers for online transactions in NEFT, review of ATM interchange fee and customer charges and implementation of the Payments Infrastructure Development Fund (PIDF) scheme as milestones towards reducing costs in the ecosystem.