On August 5, a delegation of people drawn from the deployers of the country’s point-of-sale (PoS) machines will call upon senior officials in North Block to give vent to their heartburn — the move to do away with the merchant discount rate (MDR) in the Union Budget.
The MDR is the charge levied upon merchants every time you transact through the ubiquitous PoS. It is, in turn, shared by the participants in the eco-system which runs this business —issuers, acquirers, the networks (Visa, Mastercard and RuPay), and non-bank deployers. We are talking basis points (bps) here — on a debit card transaction above Rs 2,000, the MDR is 0.90 bps of the ticket-size of which 0.60 bps goes to issuer with 0.1 bps to the acquirer; others
who make up the loop get to keep what is left. Again, this is only illustrative; it can vary hugely as it depends on how these arrangements have been crafted in the first place.
You have an installed base of approximately 3.8 million PoS units in the country and an on-boarded merchant base of nearly 2 million compared to their universe of 30 million. And there are about 925 million debit and 47 million credit cards in circulation.
What it tells you is that we have far more places to spend at and pieces of plastic to swipe with but the outlets to use them at are far too few. For instance, take a mall like the Palladium in Mumbai or a DLF Emporia in New Delhi # the number of PoS units deployed, the swipes on them, the kinds of card used, the volumes and value of transactions at these places will far outstrip the same at a thousand other smaller avenues on the same payment ecosystem. That said, a thriving PoS market will cut down on both cash transactions and boost digital. With the new thought on MDR, the business model has been turned on its head.
What is the peeve?
In FY19, RBL Bank emerged as the largest deployer of PoS in the country, punching way above its weight. It’s share of PoS deployments now stands at 19 per cent compared to State Bank of India’s 15 per cent, Axis Bank at 14 per cent and HDFC Bank at 13 per cent. On the face of it, “knocking off the MDR is to give a fillip to non-cash modes of payments. It has been coming down over the years and is lower that what you have internationally”, said Surinder Chawla, head, retail liabilities and wealth management at RBL Bank.
It’s a point seconded by Vishwas Patel, chairman of the Payments Council of India and Director, Infibeam Avenues: “The Indian MDR is one of the lowest across the globe even when monthly retail digital payments volumes are negligible.”
The announcement in the Budget is also not clear. It proposed that business establishments with an annual turnover of more than Rs 50 crore shall offer such low-cost digital modes of payment to their customers and no MDR shall be imposed on customers as well as merchants. That the Reserve Bank of India (RBI) and banks will absorb these costs from the savings that will accrue to them on account of handling less cash as people move.
“The technical issue here is that there is no MDR up to Rs 2,000. That is on the transaction size. The Rs 50-crore aspect is on the turnover. Then, what happens to all which falls in between? Again, why should there be no MDR on outlets with a turnover of more than Rs 50 crore. If anything, sales out here are higher and they should be able to absorb it (the MDR),” pointed out a banker.
A zero-sum game
What’s surprising is that nobody has till date made a case for zero MDR — be it the “Committee for Deepening of Digital Payments Chaired by Nandan Nilekani”, the “Framework for digital payments Chaired by Ratan Watal”. They were all for market-based pricing with support and focus to drive merchant acquiring. Even the “RBI Vision FY19-FY21” document for digital payment was for creating additional efficiency wherever possible in costs, and not eliminating the MDR!
“In the absence of MDR (as an income source), the business of PoS providers and other such payment service providers (PSPs) will be unviable. While the government has proposed that the RBI and banks are to absorb the MDR cost (and there are several ways for banks to recover such costs), but there is no other income for the PSPs to recover the costs that they incur on the acquiring infrastructure provided by them,” said Loney Antony, vice-chairman and non-executive director of Hitachi Payments.
Incidentally, the new proposal on MDR comes three months after Hitachi picked up a 24 per cent stake in SBI Payment Services (SBIPSPL) for Rs 1,500 crore, valuing the company at Rs 6,000 crore. On its part SBIPSPL plans to double the number of PoS units deployed by it to 1.2 million by FY22. This is part of the company’s strategy to be a key player in the Centre’s ambitious plan to increase the number of PoS terminals across the country and, thereby, garner a significant share of digital payments at merchant outlets. At May-end this year, the company had 600,000 PoS terminals. The number is expected to rise to 780,000 by the end of FY20, and double (from its current level) to 1.2 million by FY22-end. All these plans may now have to reworked.
Deepak Chandnani, chief executive officer for Worldline (South Asia) said: “With banks being asked to bear the burden of zero MDR, their acquiring business profitability will be affected. 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 and the acquiring eco-system”.
Is there a way out — like adjusting the inter-change rate (what is shared among those in the loop) and letting the market compete on MDR? Sunil Khosla, head, digital business, retail at India Transact Services (a wholly-owned subsidiary of AGS Transact Technologies) said: “Adjusting the MDR or reducing it by 15 bps may incentivise the acquirers and also pass on the benefits to merchants. This way the merchant is able to save more (as he pays less MDR). In ideal conditions, this should bring more merchants under the ambit of digitalisation provided more focus is laid on educating the merchant about its benefits”.
On offering consumers discount to increase the number of transactions at PoS, Khosla added: “Such a discount already exists in forms of rewards and cashbacks provided by the issuer and the network. This definitely encourages the consumers particularly the first timers to make PoS transaction”.
As of now, it is not consumers who are in the hunt for rewards, but those in the PoS business who have taken a pause.