Online costs to stay despite govt’s digital push

Reinforcing the government’s digital push, finance minister Nirmala Sitharaman, in her maiden budget speech, announced a host of measures to promote digital transactions, especially commercial ones. The FM said that business establishments with annual turnover of more than ₹50 crore shall offer low-cost digital modes of payments to customers and no charges or merchant discount rate (MDR) shall be levied on either the customers or the merchants. MDR is a charge that payment systems and banks levy on commercial transactions.

The aim is to shield you from MDR costs and provide you a larger bouquet of payment systems when you transact digitally. But will this really work for you already?

Applicability of MDR

When you make a digital payment, either online or through a point of sale device or a QR code at a merchant establishment, the transaction costs, in most cases, are borne by the merchant.

Accordingly, you might come across some merchants that pass on the MDR to you by stating upfront that the use of certain types of cards, like a credit card, would attract an additional charge. This charge, or a part of it, is essentially the cost the merchant has to bear for that digital transaction. Accordingly, the non-applicability of MDR to certain businesses is in reality a nudge to businesses to widen their acceptance of digital payments. However, large businesses or major online retailers rarely charge MDR to the consumers. This is because they are able to negotiate low MDR from payment service providers because of high volumes.

The budget proposal

The budget has proposed that businesses with an annual turnover of ₹50 crore will not be charged MDR by their payment service providers like banks. This will be applicable to certain types of digital transactions. The budget has proposed to insert Section 269SU in the Income-tax Act that states, “Every person, carrying on business, shall provide facility for accepting payment through prescribed electronic modes, in addition to the facility for other electronic modes of payment, if any, being provided by such person, if his total sales, turnover or gross receipts, as the case may be, in business exceeds ₹50 crore during the immediately preceding previous year.”

However, as of now, the “prescribed electronic modes” are not clear. The budget speech lists out “low-cost digital modes of payment such as BHIM UPI, UPI-QR Code, Aadhaar Pay, certain debit cards, NEFT and RTGS”. Also, credit cards have not been mentioned in the list. “The applicability is only on certain payment modes and not on all payment modes. If we read the available fine print, it says only certain debit cards. As of now, credit cards have not been mentioned. Section 269SU is not entirely clear yet,” said Dewang Neralla, chief executive officer, Atom Technologies, a payment gateway.

As of now, payment systems companies have raised some concerns over the announcement. The Payments Council of India, an industry body for payment and settlement systems, said that if not charged to the customers and merchants, MDR should be borne by the government. Deepak Chandnani, chief executive officer, South Asia and Middle East, Worldline, said in the statement, “With the banks being asked to bear the burden of zero MDR, their acquiring profitability will be impacted. It is also likely that banks would in turn try to recover some of this from their non-bank fintech partners, thus negatively impacting all ecosystem players, which are key to drive growth.”

MDR is typically shared by the banks involved in the transaction and payment systems like the aggregator, payment gateway and the card network. “If an infrastructure is being created, people should be willing to pay for the betterment of the infrastructure. Somebody needs to pay to those who are building this infrastructure,” said Neralla.

Will it benefit you?

Sachin Seth, partner , digital and fintech practice leader, financial services, Ernst and Young LLP, said that a lot of work will need to be done to detail out the guidelines to define merchant turnover, compliance mechanism, wider adoption of zero MDR payment mechanism by merchants and customers and innovation to improve customer experience and security. “Another key aspect is the loss of benefit to consumers in terms of credit period and discount deals, fraud protection, rewards points and cashbacks provided by various cards and payment service providers based on MDR model,” he said.

What happens to the fees that you pay for booking services like movie or flight tickets online? Those charges might become more transparent, but are unlikely to go away because they are not just made of MDR but also have a component of convenience fee, which is decided by service providers.

“There is also a big segment of online travel and services companies charging additional fee which includes MDR and convenience fee. It may be a good idea to put guidelines to ensure that they declare the MDR component in the convenience fee and give low-cost options to customers to reduce transaction charges,” Seth said.