NPCI says no immediate plan to review MDR, charges needed to fund technology and cybersecurity

Mumbai: Despite pushback from various quarters over the reintroduction of merchant discount rate (MDR) charges on payments through the Unified Payments Interface (UPI), the National Payments Corporation of India (NPCI) is unlikely to make any immediate changes to the fee structure and will instead wait for more data before reviewing it.

“We would like to avoid any sudden change,” managing director and chief executive officer Dilip Asbe said at the sidelines of the SBI Banking and Economics Conclave on Thursday. The charges are needed to support investment in technology, cybersecurity and infrastructure as growth in UPI transactions has slowed and investments in the ecosystem have declined, Asbe said.

“You need a large AI stack to be deployed. How do you invest into that? We launched voice-based payments, but again, the market will have to invest back in this,” Asbe said He added that there is significant demand for soundboxes, which enable voice-based payments, with 20 million merchants currently using them.

The finance ministry on 15 September brought back MDR on specified UPI transactions, after it was removed from January 2020. Under the new framework, a 0.4% MDR will apply to P2M UPI transactions above ₹2,000, capped at ₹300 per transaction. The move has since created some pushback on concerns that merchants could pass on at least some of the increased costs to customers, prompting them to look at alternative modes of payments including reverting to cash usage.

Asbe said mobile payment adoption in India remains at 35-40%, compared with about 90% in countries such as Brazil, which started their digital payments journey later. The aim, he said, is to take UPI to a billion users, which would also help create infrastructure for credit and insurance investments.

At least 10-15 of the largest banks and application providers need to proactively invest in technology to build the capacity, resilience and scalability of the UPI platform, Asbe said. NPCI has already utilised most of its IT budget for the year, meaning incremental investments will have to come from private players, he added.

Incentivising players

“It’s kind of incentivising market players to reinvest back and grow UPI. So, we thought about ₹13,000-15,000 crore could be reasonable value in year one to recover from the ecosystem,” he said. As per NPCI, the annual cost of running and managing the UPI platform is estimated to be ₹20,000-21,000 crore for ecosystem players.

Asbe acknowledged that reintroducing MDR after six years without charges had been “difficult” and could “create some pain” but said the fee was warranted given the slowdown in investment.

“During the initial five-six years, investments which the players were making in the ecosystem kind of slowed down because there was absolutely no revenue back in the system,” he said.

NPCI is therefore not expecting the charges to have “any major impact” on the volume or value of UPI transactions. Instead, Asbe said, transaction volumes could grow as industry players reinvest in the ecosystem.

“Today, there are about 900 merchant category codes (MCC). There might be 1-2 additions or eliminations. Those kind of minor changes will happen. But I don’t see any major change in the pricing policy which has been put out,” he said.

Cost dynamics

Asbe attributed the broader pushback against MDR to misinformation and miscommunication. He said 75% of UPI merchants, out of a total 60 million, do not see transactions above ₹2,000, meaning 80% of the MDR value would be accrued from merchants that already accept credit cards.

“They are already paying the charges for credit cards. We believe that the price is already embedded with the charge. So, the merchants will not pass back the charges to the customer,” he said.

Of the remaining 20%, around 10% of merchants would have gross annual business of ₹1 crore and could pass on some of the charges to customers, he said.

“Yes, there is a possibility. And the banks, NPCI, the acquirers and payment aggregators, we have to work to ensure that the charges are not passed back to them. But the quantum of that is 10% of the MDR collected. The real risk of consumers getting charged is 10% of the overall value,” he said.

An economically viable business model would also ensure that the ecosystem can invest in cybersecurity and respond in time to events or incidents in the future, Asbe said.

“We would expect the large acquirers, the large issuers to kind of create a mechanism to increase the transactions. So again, that will go back to the merchant community. It’s a long-term value which will come back,” he said.