Home / News / India /  MeitY considers reimbursing merchant discount rates for UPI to payment firms

After facing pressure from digital payment firms, the ministry of electronics and information technology (MeitY) is looking at options to reimburse transaction fees or merchant discount rates (MDR) to payment firms for merchant transactions on Unified Payment Interface (UPI) and RuPay network, according to three payment and banking executives aware of the discussions.

MeitY has held meetings with digital payment firms last month to hear grievances and is currently modeling costs to understand the extent of potential funds required to reimburse transaction fees for UPI and RuPay payments for a year, according to a payment executive quoted above.

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“MeitY wants to absorb the costs and provide much-awaited relief to payment firms, however it currently is facing challenges with funds to set up the corpus. The talks are still on though, and the IT ministry is hoping that there can be certain provisions made for these reimbursements in the upcoming Union budget," said one person quoted people, who asked not to be named.

If the ministry of finance approves MeitY’s request, the scheme could be potentially announced at the union budget, said a second payment executive who was aware of the discussions. Further, the entire disbursal scheme could be worth more than 1000 crores in value, according to industry executives.

MDR is the cost paid to banks and payment service providers (PSPs), during a transaction, and is applicable on peer-to-merchant (or P2M) payments.

The Finance Minister had earlier said that starting January 1, 2020, businesses with annual turnover of more than 50 crore will have to offer low cost digital payment options to customers, without levying any Merchant Discount Rate (MDR) on either customers or merchants.

MeitY and the finance ministry didn’t respond to queries.

Until December, MeitY was in talks with payment firms to devise an incentivisation scheme for UPI payments in the country which would look at crowdsourcing data from citizens on retail points which need to be digitised. MeitY would have then absorbed the costs relating to setting up payment acceptance infrastructure at these points, However, the talks fell through.

According to the payment executives, MeitY currently has been trying to understand the impact and stifling of growth on issuances of RuPay cards, as large Indian banks are increasingly shifting focus away from the payment network, due to lack of a transaction fee.

This has come to hurt the National Payments Corporation of India (NPCI), which operates the UPI and RuPay card network in the country, and is heavily lobbying for the reversal of zero-MDR on digital payments with MeitY on behalf of Indian banks.

It is also important to note that in spite of zero-MDR, NPCI earns a switching fee from every digital transaction made on its payment network, causing certain players in the industry to question this business model as well.

“In spite of payment firms finding no monetisation on spreading the UPI infrastructure, NPCI has been charging its switching fee for the network. For a company which just licenses these products, its revenues have grown by 40% in the last 4 years, while no other financial services company is making revenues through UPI and RuPay. NPCI has enough bandwidth to forgo the switching fee for sometime," said a second person.

A senior government official told Mint that some industry players are in touch with the finance ministry to explain their concerns and challenges.

“The industry has been telling us about their challenges. Right now, it is being dealt with by the finance ministry," said the official cited above.

Payment firms said that MeitY has been leading the discussion on the matter, and that the finance ministry was not looking to reverse its decision on keeping MDR zero.

Payment firms in the past have lamented that the lack of business model around these retail payment networks has led to multiple outages in the industry, as Banks refuse to invest on additional infrastructure for ensuring smooth flow of digital payments in the country.

In July, last year, chief executive of NPCI Dilip Asbe said that MDR is necessary since it funds the acceptance, servicing and acquiring infrastructure for UPI, and that the organisation is working with the government to bring it back.

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