Understanding the new digital payments guidelines

Introduction

India’s digital economy has witnessed a significant change in the past few years. Various initiatives taken by the Government of India (GoI) to digitalise the economy have contributed towards its transformation. From demonetisation to reduction in fees for transactions done using cards, various initiatives have boosted the rapid adoption of digital payment instruments.

As per the Reserve Bank of India’s (RBI) Benchmarking India’s Payments Systems report, RuPay has a more than 50% share in the country’s debit card issuance market.¹ The report also highlights that the point of sale (PoS) penetration in India is low and was at 427 persons per PoS terminal at the end of 2017, which is low in comparison to that in developed nations and other BRICS (Brazil, Russia, India, China and South Africa) countries.

On the positive side, due to the rapid growth in 3G and 4G network penetration, digital infrastructure has improved rapidly even in remote areas.

Post demonetisation, digital payments became as an integral part of a customer’s payment journey. The Ministry of Electronics and Information Technology (MeitY) bore the full amount of merchant discount rate (MDR) for transactions less than INR 2000, applicable on transactions made through debit cards, UPI and Aadhar Enabled Payment System (AEPS) for a period of two years till December 2019. The RBI introduced caps on debit card MDR and the National Payments Corporation of India (NPCI) further reduced the RuPay MDR from 0.9% to 0.6% for digital transactions less than INR 2,000.

Recent initiatives by the GoI to increase digital payments

The GoI, the Ministry of Finance, the Department of Revenue and the Central Board of Direct Taxes (CBDT) jointly declared policy initiatives in October 2019 to increase the scope of digital payments.² A principal feature of this set of new policies is that shops, business firms or companies having an annual turnover of more than INR 50 crore are required to provide electronic payment acceptance facility to customers.

Key takeaways from the recent initiatives

It is critical to understand the purpose of these initiatives from the business, legal, regulatory, technology and economic points of view. This initiative will have a major impact on the small and medium enterprise (SME) and the micro, small and medium enterprise (MSME) segments and provide new B2B use cases to cater to these segments.

From a business perspective, these initiatives will encourage both large- and mid-sized merchants to adopt and offer digital payments systems and will boost the existing revenue stream of merchants. Acquiring banks need to re-align the existing operating model, assuming they absorb the PoS rental fees, fixed and variable costs, etc.

Banks and FIs need to provide technology and operations support to these merchants in terms of setting up new connections and installing devices, as well as opening and maintaining accounts.

From an economic standpoint, the move will bring more transparency in the tax collections as well as provide the government with enough revenue to incentivise merchants and customers.

Way forward

From a cost perspective, banks need to forgo revenue which they used to earn in the form of MDR on RuPay debit card and UPI transactions. Banks have also been asked not to charge any interchange on RuPay- and UPI-based transactions.

Payment aggregators already operate their merchant acquiring business at extremely low margins, resulting in a lot of independent acquirers already running on negative margins. With the recent initiatives taken by the GoI, the margins will erode further and there needs to be an incentive for aggregators to compete and sustain themselves in the acquiring business.

Understanding the implications listed in the previous section, it will be interesting to note whether the capping on MDR will have any commercial benefits for merchants or will increase their costs to accept digital transactions.

Secondly, the initiative is aligned with the RBI’s Payment and Settlement Systems in India: Vision 2019 – 2021, which aims to address the supply side issues in the payments value chain. This will accelerate the creation of an acceptance development fund (ADF) that was envisaged to subsidise acquirers for deploying PoS infrastructure in tier 3 to tier 6 centres.

Thirdly, this will spur innovation in both the payments and lending space, especially in the B2B segment. Banks should take this opportunity to provide services to merchants based on improved data and fraud analytics. Banks can optimise the operations costs by providing a better reconciliation and settlement module as well as aim to implement a ‘T+0’ settlement cycle.

Lastly, the initiative aims to reduce the surcharge or commission fees collected from customers for transacting digitally. Merchants and banks should provide a seamless experience to customers in order to increase the uptake of digital acceptance.

In addition to these points, it is also critical for regulators and respective ministries to take inputs from banks and other key stakeholders in order to understand the impact of these regulations on their existing business models.

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