The government’s decisive push in favour of incentivising digital payments underscores the need to plug a number of regulatory gaps governing products such as credit and debit cards, internet banking and mobile wallets. Two of the elements that could come under scrutiny are the arbitrariness in levying merchant charges, which add to the cost of every digital transaction, and the need to enforce the interoperability of digital tools such as wallets.
One of the underlying charges in the digital transactions space, the merchant discount rate (MDR) — that is charged to a merchant accepting card payments and sometimes passed on to the consumers — is decided by the banks themselves. While there is a cap prescribed by the Reserve Bank of India on the MDR applicable on debit cards, there is no limit on that for credit cards. Government officials indicated that there could be a move towards removing the arbitrariness of the merchant rates and aligning their estimation on the “work done” principle, the principle followed for determining the interconnection charges in the telecom sector.
“The transaction involving the digital transfer of money occurs essentially entails the creation of a ledger entry by the entities such as banks, and for that charges should be close to zero. This charge should be only based on the work done. Once you do that, these transactions will become almost free,” a senior government official said. The RBI in 2012 had rationalised the MDR for debit cards, capping it at 0.75 per cent for transaction values up to Rs 2,000 and at 1 per cent for transaction values above Rs 2,000. This was done in order to encourage all categories of merchants to deploy card acceptance infrastructure and also to facilitate acceptance of small value transactions through card payments.
However, in its Concept Paper on Card Acceptance Infrastructure issued in March 2016, the RBI noted that the MDR continues to act as a clear disincentive. “Though the regulatory policy on MDR (issued in September 2012) had indicated a cap on MDR, it is generally treated as floor, with the benefit of lower MDR not really accruing to smaller merchants. In certain segments like mutual funds, insurance, etc. a flat fee structure of charges has also been established by the industry,” the RBI noted in March. Hence, cash continues to be the predominant mode of payment as it appears to be “costless” in comparison to the visible costs associated with card and electronic payments.
An industry representative said that the MDR for debit cards, despite being regulated, is fixed by banks and the payment network companies. The government official cited above said that: “These charges are being paid by a customer or a merchant to the system. It’s the banking system gain, and it is in their interest to charge the merchant or the customer. This is not financial inclusion. The Reserve Bank of India must issue a fiat to banks to end these charges. Digital transactions should be made cheap and convenient, and physical transactions should have a levy.”
The RBI has reportedly presented a number of options to regulate the merchant rates, including an option of levying uniform ad-valorem MDR across all merchant categories and locations and setting MDR for debit cards as a fixed or flat fee for transactions beyond a certain value. Another sector that has seen surge in its volumes post the Centre’s November 8 announcement is of the prepaid payment instruments, or mobile wallets. Even as the companies pay a 1-2 per cent fee to the banks when their users load money into the wallets, the bigger ones with a wider merchant network earn from the funds that stay in their own system. The National Payments Corporation of India had proposed to the RBI that interoperability between these wallets would be an added service from which customers would benefit and give boost to cashless transactions.
A government official also said that the integration must not happen only within various wallets but also with the unified payments interface (UPI). “The wallets have to be interoperable. They must get integrated with UPI. Otherwise they are just islands. Interoperability is such an essential stuff. Either you integrate them with UPI, or create their own switch, and let that switch talk to UPI. There is a need to completely integrate every payment method and architecture,” the official said. He said that interoperability between wallets must be made compulsory failing which the bigger wallets, which can sustain themselves on their own, would not opt for money transfer to and from their wallets to those run by other companies.
“If you don’t mandate payment wallets to be interoperable, the bigger ones won’t come on board. They’ll say they are big enough to sustain their network on their own. The tendency of the bigger wallets will be to not become interoperable. Similarly, the bigger banks will have a tendency to not come on board UPI. The problem is that when transactions become commoditised, big players don’t like it because they get subsumed, and they wouldn’t want to participate in the network,” the official said.