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Retail payments organisation National Payments Corporation of India (NPCI) on Wednesday said that Merchant Discount Rate (MDR), the cost which is paid to banks and payment service providers (PSPs), during a transaction, for laying down UPI acceptance infrastructure is critical for servicing and spread of the UPI in the country.

“MDR is necessary because it funds the acceptance, servicing and acquiring infrastructure for UPI in the country, and we are trying to get MDR back," said Dilip Asbe, MD & CEO, NPCI, which operates the UPI infrastructure of the country, at the virtual Global Fintech Festival 2020.

In December, last year, Finance Minister Nirmala Sitharaman had said there will be no MDR charges, which will be applicable, on RuPay and UPI platforms.

This caused NPCI to revise the interchange fee and PSP fee to zero for debit card payments through RuPay and for UPI payments in the country, leaving UPI payment apps and players with no revenue model around the infrastructure.

This has also caused several large players to move away from expanding the acceptance of UPI in the country, questioning its monetisation model. The question was posed to Asbe in line with the Acceptance Development Fund, which was announced by Reserve Bank of India (RBI) governor Shaktikanta Das, in October last year.

Major banks and payment companies were expected to transfer a percentage of their proceeds from fees accrued from processing digital payments to grow the payments infrastructure in Tier 3 and 4 parts of the country.

“There is more needed than the Acceptance Development Fund (ADF) to witness 5x growth, and support large migration of the population to digital payments. MDR is required and necessary because it funds the acquiring system and helps players deploy service QR codes and service the merchants. Players require 20 to 25 basis points on the transactions to fund this expansion," added Asbe.

“MDR is the only source of revenue for the (UPI) ecosystem. We have also launched a UPI P2P app category which is a zero MDR category," Asbe added.

Asbe also added that half a billion dollars is needed in MDR is what is need for the UPI ecosystem to sustain servicing cost and compliances around Know-Your-Customer (KYC) norm, which payment companies are expected to comply with, Asbe added.

“ADF will bring the cost of acquiring infrastructure in the country and a substantial amount has been earmarked to grow the acceptance of digital payments in the country. With volumes going up, it will also mean margins thinning down, so let’s see how the future pans out," said P Vasudevan, Chief General Manager, Department of Payment and Settlement Systems, RBI.

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