As the government of India has pursued its vision of a cashless society, it has adopted policies intended to help stakeholders shift to digital payments – from the dramatic step of demonetization to the less exciting goal of expanding broadband access.
Most recently, it’s been tinkering with the economics of digital transactions, looking for that elusive sweet spot where the parties – retailers and banks alike – are incentivized to help drive the transition.
The Reserve Bank of India announced on Dec. 6 that it plans to revise the framework surrounding the merchant discount rate for debit card and QR code transactions.
The RBI said that the change was intended to promote debit card acceptance, particularly among smaller merchants, and to ensure that the business model is sustainable.
The merchant discount rate is the overall rate that a merchant pays its acquirer for enabling electronic payments. It includes interchange and other fees that are split among the issuing and acquiring banks and the card networks.
The revised rules cap the rate that a merchant must pay as a percentage of the transaction amount. It segments merchants into categories by total annual sales, and it includes a different rate for QR codes, which the bank referred to as “asset-light” transactions. Smaller merchants pay less, and QR code transactions are at a lower rate.
Prior to this change, the rules specified different rates based on transaction value.
Then last week, the government said that it would reimburse banks for the MDR on lower-ticket transactions conducted with debit cards, BHIM, UPI and Aadhaar-enabled payment methods.
Because smaller transactions are primarily conducted in cash, the hope is that waiving the MDR will reduce reluctance to replace cash with digital payment methods, the Hindustan Times reported.
So, do payments providers operating in the region think the government’s latest bids to spur electronic payments usage will be effective?
Prasanna Rao, director of marketing for Ezetap, an India-based payment facilitator, was bullish.
“Earlier this year, the Indian digital payments industry was projected to reach $500 billion by 2020,” Rao said. “And now, with the latest announcements and initiatives by the Indian government to incentivize small and medium businesses and mom and pop shops, we see the industry exceeding its projected value, way before 2020.”
Rao suggested that the government’s efforts will catalyze small businesses’ willingness to adopt digital payment methods, driving growth among merchants and consumers alike.
“Waiving off MDR not just means an additional profit to the business but also gives businesses the leeway to provide goods and services at a discounted rate to their customers,” he said.
Amit Kapoor, CEO of Airpay, which is also a payment facilitator headquartered in India, also expressed his overall optimism about the central bank’s efforts to promote a digital economy and support the growth of electronic payment methods.
He said he already feels that QR codes are going to be an essential part of the country’s digital future.
“The QR code is the progressive change which the economy will adopt,” Kapoor said. “Presently the POS model is asset-heavy and requires huge amounts of investment and deployment is also time consuming, restricting the agility to go-to-market. With the rapid changes in technology, we do believe QR will play an active role.”
However, he said, he feels that adoption will still take some time, in part because not all consumers have the capability to scan the codes.
Kapoor said that Airpay supports adjustments to the MDR to help “build a larger acquiring landscape and build a digital ecosystem.”
However, he believes interchange rates in particular are due for a re-evaluation, with more focus on incentivizing acquirers.
“India has over 800 million cards and over 2.9 million devices. We do believe that if the banks and fintech companies have to work together to make a rapid expansion, there has to be enough play for all to build a sustainable business model,” Kapoor said.
The new MDR rates are effective Jan. 1, and the government reimbursements will be in effect for two years.