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Zero-MDR to put 50 % of card transaction vol at risk: payment cos

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At a time when the Indian fintech ecosystem is grappling with issues related to unclear regulations due to multiple regulator, e-KYC, GDPR implementation and data localization, the government has added to the existing woes by abolishing the MDR (merchant discount rate) levied on merchants and customers.

Finance Minister Nirmala Sitharamanan, while presenting the country’s Budget for the year 2019-20, announced that government will do away with the MDR, a charge levied for making card transactions both offline and online and is distributed among all the parties involved including the card companies, banks and the POS terminal providers. The charges are in the range of Rs 12-15 per transactions on amount above Rs 2,000. However, the government has decided to make it free for customers and retailers even for higher value transactions done via debit cards.

While, the Government’s intent is to promote digital payments including UPI and QR-code, the move to abolish MDR will adversely impact the usage of debit cards going ahead as it will leave the banks and payment companies such as Mastercard and Visa and POS companies such as Mswipe and Mosambee among others with no incentives to carry on with free transactions.

According to industry sources, about 80-90 per cent of the revenues, for POS terminal providers, came by the means of MDR. “They are going to suffer with no means of revenue generation,” a top banking official told IBS Intelligence on condition of anonymity. The move is an added blow for the POS providers as the banks, for the last four years, have been reducing installations of the card swipe machines at retail points.

Meanwhile, Payment Council of India (PCI), an umbrella organization for all payment companies in India, has also raised its concerns regarding the MDR issue and is likely to meet the officials at the Reserve Bank of India this week in this regard.

Naveen Surya, PCI ‘s Chairman Emeritus, said that with no MDR charges for stakeholders, 70 per cent of the card transaction volumes and 50 per cent of the transaction value is under risk.

“FinTech is a promising sector and has the potential to take India to be a five trillion dollar economy but given the point that digital payment in retail is little more than just 10%, we have miles to go and need many more players to be willing to invest and work to provide these services. This announcement would lead to the whole digital payment industry without any business and revenue model,” he added.

The Government has said that the banking regulator along with all the regulated banks in the country will bear the cost of MDR. However, it has not mentioned how the banks, payment companies and POS companies will be incentivized.

Deepak Chandnani, CEO, South Asia & ME, of digital payment solution provider Worldline, said that , “With the banks being asked to bear the burden of Zero MDR, their acquiring business profitability will be impacted. Further it is likely that banks would in turn try to recover some of this from their non-bank Fintech partners, thus negatively impacting all eco-system players, which are key to driving much needed growth of the acceptance/acquiring eco-system.”

Loney Antony, Co-chairman, PCI and Vice- Chairman, Hitachi Payments said, “Non-Bank payment service providers (PSPs) like aggregators/ processors are a significant part of the ecosystem. If there is no commercial model, they will be forced to shut down, banks may have multiple ways to recover money from the merchants, but non-bank players do not have any other avenue than the MDR. These PSPs are employing at least over several lakh jobs, and in the absence of revenue, there will be survival issues and the industry will eventually collapse.”

Digital payments have received quite high interest from various investors both domestic and international and such policies will definitely discourage investments into the fintech ecosystem.

Vishwas Patel, Chairman, PCI, and Director- Infibeam Avenues said, “Indian MDR is one of the lowest across the globe even when monthly retail digital payments volumes are negligible at USD 250 billion. The real issue for merchants to accept digital payments is the avoidance of tax and requires urgent simplifying of tax both GST and Income Tax.”

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