Update — January 9, 2021: In an email to Mint, which first reported the development, MeitY has said that they’re not considering any such proposal for reimbursing the merchant discount rate to digital payment firms.
January 7, 2021: India’s IT ministry (MeitY) is reportedly thinking about options to reimburse transaction fees or merchant discount rate (MDR) to digital payment firms for merchant transactions on the Unified Payment Interface (UPI) and RuPay networks.
MDR, around 1% of the total transaction volume processed by each platform, was a levy that had to be paid by the merchant to the processing bank. The amount was shared among acquiring bank, fintech partner and issuing bank, with 10% of the amount paid as switching fees to the National Payments Corporation of India (NPCI).
In 2019, the Indian government waived the fees on transactions on the UPI network and those done through the RuPay debit card modes to incentivise small businesses to make the switch to digital payments. But as a result of this move, many UPI apps have been left with very little revenue despite the fact that they have to spend to acquire users and bring back repeat users.
The IT ministry is understood to have held meetings with digital payment firms in December to understand their grievances with zero MDR and is currently trying to figure out the extent of potential funds required to reimburse transaction fees for UPI and RuPay payments for a year.
“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,” an industry executive told Mint, which first reported the development.
In January last year, Paytm CEO Vijay Shekhar Sharma supported the government’s move for zero MDR but said that payment apps would need the government’s support and that reimbursement would be an ideal move.
An Inc42 analysis from July had pointed out that the revenue model of purely UPI-based payments services is not sustainable in the long run, because of zero MDR. NPCI’s 30% cap on the total volume of UPI transactions through each of the third-party payment apps (TPAPs), announced in November last year, could aggravate these concerns.
MeitY’s proposal would have to be approved by the finance ministry, which could be discussed ahead of the parliament’s Budget session later this month.