On paper, the Reserve Bank of India’s (RBI) decision to link credit cards to the United Payments Interface (UPI), beginning with Rupay cards, is expected to provide more avenues and convenience to the customers in paying via UPI. The problem, however, is that the announcement seems to have raised more questions than it answers. For a start, there is no clarity on how pricing will work for a combination of payment channels that currently operate on two extreme ends of the merchant discount rate (MDR) spectrum.
On the one hand, there is UPI, on which banks and non-bank intermediaries have been earning no MDR at all since January 2020. On the other hand, there are credit cards, where the fee structure is left entirely to market forces. Unlike debit card payments, the MDR on credit card transactions is not subject to any regulatory caps. Each merchant signing up to accept credit card payments must negotiate a mutually acceptable rate of MDR (typically 2-3) with their acquirer.
There are also questions on whether or not Visa and MasterCard, with a much larger share of the credit-card market than RuPay, will be allowed to tap into the new enablement. Quite naturally, the announcement has led to speculation on whether MDR is actually going to be brought back for UPI and RuPay debit card transactions. A similar hope had been kindled in December 2021, when RBI said it would release a working paper on transaction charges in the payments industry. But, given the government’s unyielding stance on the matter, a return to pre-2020 pricing seems unlikely.
RBI, on its part, does appreciate the need for adequate compensation for companies as they go about installing payments infrastructure in the country. It has acknowledged in the past that even the MDR rates prevailing before 2020 were hardly enough for the industry to break even. Soon after the zero-MDR regime kicked in in early 2020, RBI officials had managed to extract a promise from the finance ministry that it would review the policy six months down the line. In private conversations with stakeholders, RBI officials are known to have said that MDR on UPI is “a battle fought and lost.”
Given RBI’s keen understanding of the dynamics of the payments business, it is doubly intriguing that it chose to dodge a question on pricing at the post-monetary policy press conference last week. No entity would like to invest in creating enablements for a business which will result in them bleeding money. Until the pricing structure for the UPI-credit card linkage is clearly spelt out, banks may be unwilling to implement this revolutionary idea. Bringing back MDR on UPI might be a little like trying to put the genie back in the bottle. It is no coincidence that UPI saw exponential growth in merchant transactions only after the zero-MDR regime kicked in. Whether the QR codes that have mushroomed across store fronts and handcarts will survive the return of MDR is anybody’s guess. It is more than likely that they won’t.
Banks, too, must take a share of the blame here for always being a step behind the regulator on pushing digital payments. RBI recently put out a notification asking banks to cough up what they owe to the Payments Infrastructure Development Fund. Banks should be more proactive in contributing their share for the creation of payments infrastructure. That RBI has had to lay down guidelines on how much and when banks should put in money reflects poorly on the latter and leads one to question their commitment to the cause of digital payments.