Are High Fees Slowing Down The Move Towards Digital Payments?

The government’s decision to withdraw Rs 500 and Rs 1000 notes has been followed by an effort to push consumers towards digital payments. On Wednesday, Economic Affairs Secretary Shaktikanta Das said that various departments of the government are migrating to digital transfers for salaries of employees and urged citizens to use digital wallets and debit cards for all kinds of payments.

The government also noted that some organisations and banks have decided to waive service charges on the use of debit cards till the end of December. Among them is the National Payments Council of India, the provider of RuPay debit cards, which has decided to waive switching fee till December 31. State Bank of India has waived charges on RuPay debit cards while ICICI Bank and Axis Bank have decided to waive charges on all debit card transactions.

The Reserve Bank of India, too, has pushed digital initiatives in the aftermath of the currency withdrawal. On Tuesday, it announced that the limit for digital wallets would be doubled from Rs 10,000 to Rs 20,000 a month.

Digital payments have grown rapidly in India over the last few years but are yet to make a significant dent in the cash economy. According to Reserve Bank of India data, the value of debit card transactions at point of sale (PoS) terminals has grown by over 63 percent between 2012 and 2015. Credit card transactions at PoS terminals has grown 54 percent.

Still, estimates suggest that over 90 percent of all transactions in India are carried out in cash. Some argue that if the cost attached to digital payments were to reduce, the pace of adoption may be quicker.

The Cost Of Going Digital

At present the cost of digital transactions, also known as the merchant discount rate (MDR), ranges from 1-2.5 percent of the transaction value. This may be too high for smaller retailers which explains the relatively large share of cash transactions across sectors like unorganized retail.

Kaila, who specializes in the financial services sector, adds that there is some justification for high charges on credit cards.

“One needs to understand that banks provide credit card users with an interest free period on their transactions. High MDR makes up for the loss of interest to the banks.”

In a concept paper on card acceptance infrastructure released in March 2016, the RBI had mooted the idea of a lower merchant discount rate as a way to boost card payments.

The central bank had capped the MDR for debit cards at 0.75 percent for transactions less than Rs 2000 and at 1 percent for transaction values above Rs 1000.

The Reserve Bank also noted that the growth of card acceptance infrastructure in the last three years hasn’t kept pace with the increase in number of cards.

How Does The MDR Work?

MDR is shared among entities participating in a digital transaction, including the bank which issued the card, the card payment network such as Mastercard or Visa, the bank which provides the point-of-sale terminal and, at times, a technology aggregator or payment gateway such as PayU. The precise rate is decided based on an agreement between the banks and merchants depending on the transaction size and category of the commodity.

The MDR for credit cards is currently uncapped but industry experts say it varies between 1.8-2.5 percent of the transaction value on average. The MDR cannot be passed on to the consumers except in the case of petrol or public utilities like railway tickets. As such merchants often prefer to stick to cash since costs of operating on cash are not explicit.

Those operating in the payments industry feel that lower MDRs aren’t the answer. They, in fact argue that the prevailing cap on the MDR may be acting as a disincentive.

Mastercard and Visa declined to comment on the story. However, in an October 2016 report, Visa argued that lower MDR has only helped large merchants.

Mrinal Sinha, chief operating officer of MobiKwik agrees. His company has waived off all transaction charges for small merchants till the time cash-crunch continues in the economy. Sinha, however, added that those who have the ability to pay these charges, should do so since business models are based on these charges.

“We have decided to voluntarily waive off MDR for small merchants since they are already going through a lot of heartburn and facing sluggish business due to the cash-crunch. However, large merchants should be paying us MDR rather than evading it,” Sinha said.

Short Term Waiver Justified

While the broader debate over an appropriate level of MDR is yet to be resolved, the Payments Council of India says that a temporary waiver of debit card transaction charges is justified.

Surya said that a waiver of charges may remove the “mental barrier” against digital payments but added that the current situation need not be linked to the broader issue of rationalising of MDRs.

“Interchange rate should be reviewed and balanced because it’s charged by payment infrastructure providers like banks,” Surya said. There could be differential MDR for different players but market works the best, he added.

Kaila, still argues that the RBI should step in to rationalise MDR while keeping in mind the interests of both the merchants as well as the payment companies.