Govt's Zero MDR move has hit payments industry badly, says RBI committee

The fintech space also attracted over $2 billion of capital in the last two years
The government’s decision to reduce merchant discount rate (MDR) to zero for certain payments has hurt the industry quite negatively and may discourage innovation, a committee on QR (Quick Response) code based payments has said in its report.

The committee’s main recommendation was that there should be uniformity in QR code types and they should be interoperable wherever possible. But the committee was quite vocal on the abolishment of the MDR charges, something that participants in the Global Fintech Fest also highlighted at a virtual event. The event had the participation of Dilip Asbe, MD and CEO of National Payments Corporation of India (NPCI), who is also one of the members in the QR Code committee.

In December, the government said transactions done through RuPay and Unified Payments Interface (UPI), floated by NPCI, will attract zero MDR.

Such reduction impacted the survival of payment gateway entities, “hampering innovation efforts and resulting in job losses and a slowdown in the expansion of the digital payment infrastructure in India,” the report of the committee said.

The MDR reduction has led to contraction in the national gross value of services and to significant contraction in the revenue of the payments business which supports multiple participants in the eco system. Most of the players are from small and medium enterprises (SME) background and they have been affected badly.

“The payments ecosystem together with the downstream vendors/providers etc. directly and indirectly employ several lakh people and without revenues from businesses, these jobs are disappearing as there are no incentives or incomes for deploying QR codes in the country’s hinterlands,” the report said.

The fintech space also attracted over $2 billion of capital in the last two years. But the reduction in MDR rate meant the space may not attract capital in the future. “The expectation of revenue generation from digital transaction processing has been severely affected by Zero MDR,” said the report.

The payments industry has spent more than Rs 2,000 crore in digital payments promotion and continues to invest more than Rs 1,000 crore in capital expenditure annually, the committee noted. Such action by the government will impact the ability to achieve the government’s goal of 4000 crore digital transactions and digital India initiative, it said.

The committee is headed by D.B.Phatak Professor Emeritus at Indian Institute of Technology, Mumbai, Arvind Kumar Director General, Standardisation Testing and Quality Certification (STQC), at Ministry of Electronics and Information Technology, Sunil Mehta Chief Executive, Indian Banks' Association, A.S. Ramasastri, Institute for Development of Research in Banking Technology, Dilip Asbe Managing Director and CEO, National Payments Corporation of India (NPCI), Vishwas Patel Chairman, Payments Council of India.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel