Budget 2019: Government’s push for digital payments a testbed for banks

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New Delhi | Updated: Jul 09, 2019 4:33 PM

Budget 2019: The MDR charges are being proposed to be done away with.

Union budget, budget 2019, Debit Card, ATM Card, Credit Card, NEFT, RTGS, FeCharges, Late Payment FeeBudget 2019: Finance Minister Nirmala Sitharaman is proposing to do away with MDR charges on digital payments

Budget 2019: In a bid to promote digital transactions in India, the government has proposed removing the bank charges on digital payments, commonly termed as Merchant Discount Rate (MDR). In her maiden speech, Finance Minister Nirmala Sitharaman said that the businesses with an annual turnover of Rs 50 crore or more will not pay the 2 per cent levy on online payments.

The government’s decision is likely to impact banks that will have to lose out on the revenue generated for each online transaction. But, at the same time, it will provide an impetus to readily available payment options. Sitharaman said that it will become mandatory for large retailers to offer low-cost e-payment facilities to the customers, which includes the likes of BHIM UPI, UPI QR, Aadhaar Pay, NEFT, RTGS, and certain debit cards.

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“Government’s decision of not charging merchants for online transactions will affect banks, which eventually will boil down to a reduction in merchant partnerships with banks for digital payment infra,” said a top executive in a renowned bank, requesting anonymity.

The charge of 2 per cent is not passed to the customer and has to be borne by the merchant and RBI, giving banks a plausible stream for revenue generation. The merchants pay MDR charge to banks for providing them with the infrastructure that facilitates online payments including card transactions.

This setup between banks and merchants has been a mainstay for retail transactions. The government is now proposing the charge be absorbed by banks and RBI, leveraging the interest capitalised on the cash inflow from the users of banking services.

While the move to do away with MDR charges will unclog the online payment channel for merchants, it will also provide them with 2 per cent more margins on transactions. The adoption of UPI and other similar services offered by third-party vendors will rise.

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An executive working in a card payments company has lauded the government’s efforts to push the adoption of digital payments. However, the grey areas, including the scope of credit and debit card payments, still need to be clarified by the government so as to provide a clearer picture for major players in the industry.

Of course, the volume drive in mobile-based payment options will come at the expense of card payments. However, the government is simultaneously making efforts to increase the usage of RuPay cards in the country. The government has been vocal about the emergence of RuPay as a “healthy competition” in the card payment space that has been duopolistic in India for a long time. With RuPay cards, banks could improvise their relationships with merchants to achieve the high-stakes plans of the government.

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