Zero MDR: No Fee On Digital Transactions Will Lead To Shutdowns, Says Payments Council

The digital payments industry lobby said the government’s proposal to abolish fee on cashless transactions could lead to industry-wide shutdowns and hurt bank revenues.

Finance Minister Nirmala Sitharaman, in her maiden budget, proposed that “business establishments with an annual turnover more than Rs 50 crore shall offer low-cost digital modes of payment to their customers” without merchant discount rate—a fee charged to the end user. The Reserve Bank and banks would bear the cost instead, Sitharaman said.

“Considering digital payments in retail are little more than just 10 per cent [of all transactions], we have miles to go and need many more players to be willing to invest and work to provide these services,” Naveen Surya, chairman emeritus at Payments Council of India, said in a statement. “This announcement of industry-bearing MDR would lead to the whole digital payments industry without any business and revenue model.”

The council’s statement said compulsory digital payment options by all merchants with a turnover above Rs 50 crore turnover and a penalty mechanism is a positive step. But the “zero MDR” policy, with the RBI and banks bearing the costs, came as a surprise. The fee in India is one of the lowest globally and no report has recommended a “zero MDR”, it said, adding that the RBI’s committee for deepening of digital payments suggested a market-based pricing mechanism.

Loney Antony, co-chairman, PCI and vice-chairman at Hitachi Payment Services Pvt Ltd., said non-bank payment service providers such as aggregators and 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.”

Deepak Chandnani, chief executive officer, South Asia and Middle East, at Worldline India Pvt Ltd., said if banks have to incur the cost of processing transactions, they would try and recover it from their non-bank fintech partners. That will negatively impact all eco-system players, he said.

The council said the move will deflate the hard work done by the acquiring industry and MDR, if not charged to the customers and merchants, should be borne by the government. “Knee-jerk policy changes like this is likely to spook such investors and will not be in favour of the government’s direction of attracting foreign capital,” it said.

The real issue is that merchants avoid adopting digital payment systems to avoid tax, Vishwas Patel, chairman at PCI and director, Infibeams Avenues Pvt Ltd., said. It requires urgent simplifying of both income and goods and services tax laws in this sector, he said.