While UPI transactions have grown manifold since the launch of the payment mode in 2016, with volumes of 620 million in December, merchant transactions account for just 15-20% of these.
If digital transactions are to take a quantum leap, it is necessary to ensure that the MSME sector participates in the transition from cash to digital channels. Currently, small merchants and vendors are loathe to transact either via digital channels or cards. For one, they want to stay out of the taxman’s net, which is not surprising. Secondly, the merchant discount rate (MDR) is an additional cost, which they understandably do not want to pay. With customers also wanting to stay off the taxman’s radar, it is not surprising cash remains popular.
If the government wants to encourage digital transactions, it needs to push the envelope. And the best way to do this is to incentivise small merchants. For one, it should do away with the MDR—at least for the very small merchants—and classify them as peers for QR-based Unified Payments Interface (UPI) transactions. Such a proposal is understood to be under consideration, and the government would do well to implement this quickly. The MDR for UPI transactions stands at 0.25% for transactions under Rs 1,000 and 0.65% for all other transactions. With the MDR out of the way, merchants might be more amenable to digital transactions. While UPI transactions have grown manifold since the launch of the payment mode in 2016, with volumes of 620 million in December, merchant transactions account for just 15-20% of these.
Again, once merchants are registered as GST assessees and there is a data trail, banks should be more open to offering loans at attractive rates of interest and also reduced collateral. This would ensure that merchants are not forced to borrow from the local money lender at usurious rates. Today, the majority of small merchants do not have access to formal credit, and even those that do, are able to fund less than 50% of their working capital needs through bank loans. Once he realises that his economics is improving—thanks to the access to formal credit—a merchant would be more willing to transact digitally. And, the government would stand to gain from more buoyant tax collections.
While banks say they are keen to push digitisation, their actions don’t support this claim. Indeed, the larger banks appear to be dragging their feet if not altogether stalling digitisation, especially in semi–urban and rural geographies. They have been consistently refusing to raise the inter-change fee which is to be paid to smaller, new-age lenders that are installing micro-ATMs. The big banks—who call the shots in the NPCI—fear they will lose customers to the newer intermediaries and are believed to be pushing for a cut in inter-change rates. That would be a big disincentive for lenders that are installing micro-ATMs and the government must ensure this does not happen.