Reserve Bank may rationalise some payment charges, says industry

Others say central bank may relook zero merchant discount rate on RuPay, UPI

The Reserve Bank of India’s (RBI) decision to float a discussion paper on charges in payment systems has evoked mixed reactions from the industry with many saying that the regulator should look at rationalising certain charges that are on the higher side. 

The RBI may, in fact, also look at introducing charges on certain instruments and players, who are currently exempted from any fees.

The apex bank had earlier said the discussion paper will cover all aspects of charges in digital payments such as credit cards, debit cards, prepaid payment instruments (cards and wallets) and Unified Payment Interface (UPI), among others. 

The main objective of the regulator is to make digital transactions affordable to users and economically remunerative to providers.

DISCUSSION PAPER ON DIGITAL PAYMENTS SYSTEMS

• Aim is to make digital transactions affordable to users and economically remunerative to providers
• Industry players say the RBI may introduce some slab-based charges on transactions through certain instruments that are currently free
• Customers are not charged for transactions be it through debit cards, credit cards, or UPI
• Since MDR charged by wallets and PPI instruments are not regulated, the RBI may bring down charges in this segment
• This could impact fintechs in the payments space, a Macquarie Research report said

Entities involved in providing the infrastructure for digital payment services incur costs, which they then pass on to the merchants. Customers are generally not charged for transactions be it through debit cards, credit cards, or UPI.

Currently, UPI payments do not attract merchant discount rates (MDRs), while for debit cards, MDR is capped at 0.9 per cent for transactions, except for RuPay debit card, which attracts zero MDR. 

In the case of credit cards, there is no cap on MDR. For wallets and PPI instruments, the MDR is not regulated and may range from 1.5 to 2.5 per cent, and in some cases, even higher. MDR is the rate at which merchants are charged for accepting payments made via credit cards, debit cards, net banking and digital wallets.

“The RBI may review and rationalise some of the existing charges that are considered to be on the higher side. For example, charges on prepaid cards and prepaid instruments, where merchants are charged 1.5-2 per cent compared to less than 1 per cent for debit cards. Secondly, it may look at introducing some slab-based charges on transactions through certain instruments that are currently free, such as MDR on Rupay debit cards and UPI,” said an industry expert.  

In 2019, MDR on RuPay debit cards and UPI was waived off by the government to incentivise merchants to adopt digital payment methods. But, since then, banks have been reluctant to issue RuPay debit cards, despite the government’s diktat, and are moving to other card networks, where such charges are allowed.

Vishwas Patel, executive director, Infibeam Avenues, said, “Our sense is that the RBI may talk in favour of introducing MDR on Rupay debit cards through this discussion paper. This is because, currently, banks are reluctant to issue new Rupay debit cards. They are instead migrating to Visa and Mastercard because there is no incentive for them to issue RuPay debit cards. So, this is putting RuPay cards at a rather disadvantageous position. So, some reasonable MDR should be there so that the ecosystem grows in a healthy manner. Even MDR on UPI should be introduced.”

Suresh Ganapathy, associate director, Macquarie Capital, said in his report, that if RBI enforces a cap on MDR for credit cards, resulting in a loss of interchange fee for players, then banks and credit card issuers will try to ensure that the card networks bear part of the cost. Also, they will have to tinker around reward point structures to manage the impact. 

Currently, when it comes to MDR, the issuing bank takes 60 per cent, and the balance is shared between network providers and the acquirers. Further, since MDR charged by wallets and PPI instruments are not regulated, the RBI may bring down charges in this segment.

This could potentially impact fintechs in the payments space, a Macquarie Research report said. “Any further caps on payment take-rates will negatively impact PayTM’s already weak payment margins,” the report said.

In a subsequent report, Macquarie Research has also said that RBI may charge the payment service providers (PSPs), who use the bank networks for UPI transactions. 

“Banks incur a lot of cost in setting up the infrastructure at their end, invest in compliance and fraud-monitoring systems, among others. So, there is a possibility that, in order to incentivise and compensate them, PSPs could be charged in the UPI ecosystem. This means they will bear the cost,” the report added.