The Reserve Bank of India (RBI) allowing the linking of RuPay credit cards to the Unified Payments Interface (UPI) network is positive for customers but “zero MDR cannot be the situation,” said Rama Mohan Rao Amara, Managing Director and Chief Executive Officer at SBI Card.
“Yesterday's development is positive particularly from a customer perspective. Hitherto when you go to UPI, you have to link your deposit account and you have to pay immediately. You will be drawing your own balances in the deposit account. But now this RuPay credit card can be linked to UPI, with an option to spend and pay later as per the credit card's billing cycle. So that way, it improves the convenience of the customer,” Amara told CNBC-TV18.
Following RBI’s decision, users will be able to link indigenous RuPay credit cards to UPI, to begin with, with networks such as Visa and Mastercard expected to follow.
However, the UPI transactions linked with a deposit account and a credit card are two separate systems with different financial logic, explains Amara.
"That way credit card is uniquely placed as compared to a debit card or a kind of using UPI and operating on the deposit account — as much as the pre-credit period is there, which is actually funded by the card issuer. So, obviously, that has to be taken into account in terms of pricing. So zero MDR cannot be the situation. That can be the expectation but the reality is that the issuer has to be defrayed for faster funding. So, I think the pricing structure will have to evolve now. We are expecting that consultations will begin between the industry and NPCI, where we are confident that some kind of structure will come out, which balances the interests of all the stakeholders."
RBI hasn't shared details about MDR and even on June 8 when asked about the pricing model, RBI Deputy Governor T. Rabi Sankar said that "thinking about the pricing structure will be jumping the gun.”
Not just SBI Card's Amara, other experts have also questioned how the RBI will apply MDR for UPI transactions via credit cards.
In a tweet on June 8, market expert and CEO of Capital Mind Deepak Shenoy said, "I don't think UPI linked to RuPay cards is going to succeed if it means making merchants pay for it — merchants will simply stop using UPI, or not allow card payments."
Why is MDR a big issue here? Let's dig deeper.
A merchant discount rate (MDR) is a user fee on every transaction levied by banks and payment service providers on merchants for providing infrastructure to accept digital payments from their customers. The charge is shared between banks and payment service providers such as RuPay, Visa, Mastercard or Amex) involved in the transaction.
The government has scrapped MDR on RuPay and UPI transactions since January 1, 2020 (as announced in the Union Budget in July 2019) and it has been a sticking point between the government and digital payment service providers. The decision was taken to boost payments through home-grown real-time payments system UPI at merchant locations, along with RuPay debit cards.
And it did help as since the scrapping of MDR charges, UPI adoption has increased sharply, recording about 504 crore transactions by March 29, as per a PIB tweet. The total digital transaction value shot past the $1 trillion mark in FY22, it added.
MDR is the key source of revenues for the payments ecosystem — including banks — and credit cards contribute the most. The interest rates on credit cards are very high, usually above 30 percent, making it one of the most profitable businesses for any lender.
Given the costs involved, card networks and banks cannot afford to let these credit card-based UPI transactions occur without any fees. Barring RuPay debit cards linked to UPI, transactions through Visa and Mastercard debit cards too attract an MDR of 1.65 percent for classic cards and 1.85 percent for premium platinum cards or even higher, as per a Moneycontrol.com report.