MDR: KILLING THE GOLDEN GOOSE

India Today - - FROM THE EDITOR-IN-CHIEF - PRASANTO K. ROY

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

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