Though the government stopped commissions – Merchant Discount Rate, or MDR in jargon – on all UPI payments as well as RUPay cards – from the beginning of the year in the belief that more merchants would start accepting UPI payments once the MDR was abolished, this is premised on incorrect assumptions. While the MDR used range from 0.25% to 0.65% (for transactions above Rs 2,000), this is now a flat 0.3%. Indeed, thanks to the way UPI commissions are structured, 80-85% of the 5-6 million merchants who accept UPI payments do not even pay MDRs. This is because there is no MDR on transactions below Rs 100 and, thanks to a category called UPI P2PM created two years ago, no MDR charges are paid by merchants who have a monthly turnover of Rs 100,000; this used to be Rs 50,000 earlier. If, despite this, firms like PhonePe, PayTM and Google were still spending money to get merchants to use their UPI-based services, it was because they hoped that, over time, the merchants would get bigger and start paying MDR.
If fintechs like PhonePe or PayTM can no longer make money through the MDR, and there are going to be more restrictions over how the data of consumers can be used, the government has to ask itself why fintechs or banks will invest in promoting UPI or RUPay cards? In which case, this can affect FDI flows into fintech as well, estimated at $2.5 billion last year. Sure, a government mandate may force more firms/outlets to offer such services, but offering the services and encouraging customers to use them are two different things; in any case, the mandatory on-boarding applies to firms that have an annual turnover of more than Rs 50 crore and so does not apply to the majority of merchant outlets in the country. Whether the government can force PSU banks to push RUPay is not certain if the banks incur more costs than they earn from getting merchants to use their cards.
Another issue the government needs to think about is whether it was MDR commissions or something else that was slowing merchant acceptance of UPI/digital payments. Given most merchants don’t pay MDR anyway, chances are merchants are more afraid that accepting payments via UPI will put them into the tax net as all payments will be routed to their bank accounts. Apart from what this does in terms of their tax liability, they can also come under the scrutiny of other government agencies like EPFO etc. Unless the government reverses its order, one of its biggest achievements in terms of digitizing payments can start coming undone.