Union Budget 2021: Implications on digital payments

Compensation for revenue loss due to Zero MDR on UPI and RuPay

The Indian payments ecosystem went through significant changes in 2020, largely due to the Zero MDR policy announced by Finance Minister Nirmala Sitharaman in 2019.³ The policy dictated that no MDR would be charged on Unified Payments Interface (UPI) and RuPay payment modes to promote the acceptance of digital payments among merchants.

The policy was intended to encourage the adoption of digital payments by smaller merchants by abolishing the MDR levied on them. However, it was also heavily contested by various players in the ecosystem, citing the loss of revenue as a major deterrent for optimal functioning of the industry. MDR accounts for a large source of income for acquirers who use it to pay interchange, switching and payment service provider (PSP) fees to other stakeholders. The absence of MDR could have a ripple effect on the viability and profitability of various players in the digital payments value chain.

As per PwC's analysis and calculations, the total revenue loss due to Zero MDR was around INR 1,450–1,500 crore for UPI person-to-merchant (P2M) payments and ~INR 1,000–1,200 crore for RuPay payments in 2020. Approximately 30-35% of this MDR loss was accounted for small value transactions of value less than INR 2000. The majority of the losses were borne by acquirers, PSPs and issuers.

There have been some interim relaxations on interchange and PSP fees for UPI P2M transactions and industry players have also devised newer ways to compensate for the losses incurred (such as merchant annual charges, higher settlement timelines to increase float, focusing on valueadded services for merchants, etc.). However, the larger effects of revenue loss persist, especially with the downstream outcomes on employment, innovation and expansion of the digital payments industry.

It is likely that a majority of the INR 1,500 crore earmarked for digital payments would be allotted towards compensating for the losses incurred by the industry due to the Zero MDR policy. There have been previous instances of compensating for losses when MeitY reimbursed the MDR charges on debit card, BHIM UPI and Aadhaar Enabled Payment System (AePS) transactions worth less than or equal to INR 2,000 for a period of two years from 1 January 2018–December 2019.⁴ This incentive promoted digitisation and reduced the burden on banks to set up acquiring infrastructure.

If the Government focuses on compensating for Zero MDR for both UPI and RuPay transactions below INR 2,000, then the total amount to be compensated would be around INR 600–800 crore. The INR 1,500 crore outlay can can be utilised for this purpose.

Potential budget allocation (expenditure of INR 1,500 crore)

Setting up merchant-acceptance infrastructures for digital payments

The Government could also consider allocating funds for setting up digital payments acceptance infrastructures, especially for the MSME segment and rural areas.

The Payment Infrastructure Development Fund (PIDF) has already been set up by the RBI with a corpus of approximately INR 345 crore. The PIDF is being used to install up to one million physical point of sale (PoS) and three million digital PoS machines in rural India (tier 3–6 cities).⁵ However, there is substantial scope for further investments to promote the acceptance infrastructure in the country. There are approximately 63 million MSMEs in India, with around 99% of them under the ‘micro’ segment and 51% of them in rural regions.⁶ The current acceptance infrastructure of 8.6 million digital acceptance points (5.8 million PoS machines and 2.8 million Bharat QR acceptance points as of December 2020⁷) account for only around 13% of the potential acceptance points in the country. Thus, the Government could consider allocating additional funds worth INR 200–300 crore to promote digital payments beyond the PIDF scheme’s targets.

Encouraging digital payments for toll collection

FASTag – the National Highways Authority of India’s (NHAI) electronic toll collection system – is another great initiative by the Government to promote digital payments in toll-collection booths. Currently the NHAI is paying an MDR of 3–4% on FASTag collection which is way higher than the majority of the other payments modes, including cards (with an MDR of 0.5–2%). A total of INR 196 billion was collected through FASTag in 2020, out of which MDR accounted for INR 600–800 crore.⁸

Typically, the issuer, NPCI and IHMCL (Indian Highway Management Company Limited) receive their fixed shares from the FASTag MDR, i.e. 1.5%, 0.25% and 1% respectively, and the acquirer receives its share following a bidding process that caps the amount at 1.25%.⁹ The toll industry has witnessed a decrease in MDR up to 2.5–3% and acquirers have to bear the majority of the losses, with bidding as low as 0.3%. Thus, acquirers can be compensated up to 0.5% of the toll collection for promoting FASTag adoptions, amounting to approximately INR 100 crore.

Further, the Government may also allocate funds to promote the adoption of FASTags in state highways and other use cases such as parking and fuel payments. As of February 2021, only 112 state highways were digitised with FASTags.¹⁰ If state governments target to install FASTags on approximately 500 state highways and assuming INR 30 crore is collected from each highway in a year, around INR 15,000 crore would be added to the total toll collection. Therefore, if acquirers are compensated 0.5% of the toll collection to achieve the target of 500 tolls, the Government can allocate approximately INR 75–100 crore for promoting the digitisation of toll collection on state highways.

Investing in marketing, awareness and innovation

Marketing and awareness campaigns by the Government and the industry are the key pillars for encouraging digital payments initiatives in the country. Given that the industry has spent more than INR 2,000 crore on the promotion of digital payments and incentives to improve uptake over the last two–three years,¹¹ it could be expected that a marginal share of 5–10% of the Government’s INR 1,500 crore expenditure may be allocated for campaigns such as:

• awareness campaigns (run by MeitY in conjunction with various other entities like the NPCI, Ministry of Road Transport and Highways, Ministry of Power, women-led self-help groups and more) like product roadshows in rural areas and digital literacy programs
• the development of a centralised and unified platform that enhances customer awareness to prevent and reduce overall digital payments fraud, and provides information on various digital payments modes available in the country and associated regulations about their limits, incentives, usage instructions, etc.
• advertisements highlighting the advantages of digital payments
• initiatives to encourage more tech start-ups to create simpler products in multiple languages to improve access.