MDR: KILLING THE GOLDEN GOOSE
It’s a startling plan. One that defies logic, even to those well-versed with policymaking in modern, nationalist, digital India. In Finance Minister Nirmala Sitharaman’s maiden Budget, she announced that, to promote a lesscash economy, all charges would be waived for ‘certain debit cards’ and other digital payments. The merchant discount rate (MDR) would become zero.
The MDR is what a merchant pays for accepting a card payment—a rupee or so for every Rs 100 received. That rupee compensates the players in the digital-payments chain. The merchant saves on cash handling, and gets customers who prefer digital payments and who spend more than cash users.
The new proposal is like telling all retail outlets: you will henceforth sell everything at the price that you buy. Margins are banished.
Even if only ‘certain debit cards’ are affected, such as the governmentbacked RuPay, this could be an existential blow to other cards. If one card is freed of all charges, why would merchants accept others? Even worse for competition would be if those ‘free cards’ were subsidised by the taxpayer. Today, sub-Rs 2,000 transactions get MDR reimbursed by the government.
Zero MDR will lead to the collapse of the payments-acquiring industry, says the Payments Council of India. And this bolt from the blue flies in the face of experts-committee reports: the finance ministry’s Ratan Watal report of 2016 and the RBI’s Nandan Nilekani committee report in 2019.
There is no free lunch: someone always pays. So who will pay for payment networks, card machines, or employee salaries in payments firms?
The answer was fuzzy. The RBI and the banks will pay, via savings from handling less cash as people move to digital payments, said Ms Sitharaman. News flash: businesses run on revenue models, not on cost-savings or charity as driver. And most of the whopping cost of cash is borne by the taxpayer. So if the government is saving, say, $25 billion, why should it not cough up the compensation, instead of banks or the RBI—the latter recently stripped of $25 billion?
Interest on loans pays for banks’ expenses. Similarly, the MDR pays for the costs of payments networks. It’s split between the acquirer (whose card machine accepts the card at the point of sale), the issuer (the bank that issued the card), and the network (Visa, Mastercard, RuPay). Killing the MDR removes the merchant as a source of funds. So, who pays? The customer? There are annual fees on some credit cards—but according to the RBI, in December 2018, India had 958 million debit cards and just 44 million credit cards.
For days after the Budget, payments executives were walking around in a daze, like chickens zapped before slaughter. Whodunit, they asked. Not us, said the RBI. Not the National Payments Corporation of India (NPCI), which has since brought up the issue with both the RBI and the finance minister. The brainwave appears to have come from the finance ministry’s department of revenue and the department of financial services.
As with several recent policies, including the RBI’s data localisation mandate in 2018, this one came in with zero consultation. Objectives weren’t spelt out. No experts looked into outcomes (or alternatives, such as mandating digital transactions for all government payments).
It’s a measure of the fear of this government that most banks haven’t spoken out (Visa and others have, though). Only four Indian banks have brought up the issue with the RBI and government. The global ones are waiting and watching, as they did with data localisation.
Digital payments have been a crucial and strategic focus for the Modi government since 2016. Starved of revenue in an economic downturn, digital payments might well look like a shining golden goose that can swallow the grey economy and lay golden tax eggs. And so an abrupt move to torture and kill that goose is, as Alice might have said, curiouser and curiouser. ■
Ignoring the views of the RBI and expert panels, the Budget featured a startling plan to make digital payments ‘free’
The author is a tech writer and policy consultant