Analysis of charges levied on digital payments

The benefit of the existing model is that it encourages smaller merchants to accept digital payments.

The current MDR regime has undergone multiple alterations according to the feedback received from the industry, and the same has been accepted by all the stakeholders. Small merchants work on thin margins in order to compete with e-commerce players who offer huge discounts and incur higher supply-chain costs. We believe that the existing percentage-based MDR is appropriate, as merchants will then be charged according to the transaction amounts. Having a fixed-amount model may result in the merchants paying more for small-ticket transactions. Thus, the RBI and other stakeholders can still work on further reducing the transaction charges for debit cards. This regulation on the MDR provides benefits to all merchants.

Moreover, having a different upper cap for small and large merchants is a type of subsidy for small merchants, and we believe this should be continued.

With deregulation, smaller merchants may have to pay higher transaction MDR, and they may become unwilling to accepting digital payments. To ensure the interest and wellbeing of smaller merchants, the RBI should regulate the entire MDR, and not just the interchange.

The existing pricing model encourages merchants to accept payments digitally, as there are no transaction charges involved.

The disadvantage is that the NPCI and banks incur the operational cost, and with zero MDR, banks are presently absorbing this cost. Moreover, there is a lack of uniformity in debit card transaction charges. Visa, MasterCard and Maestro debit cards all presently have an MDR which is applicable to merchants.

The RBI should ideally mandate a uniform charge for all debit card transactions. Presently, the MDR for non-RuPay debit cards has been set by the RBI, and the pricing model has been accepted by all stakeholders. Additionally, it is up to the PSO (NPCI for RuPay debit card) to determine if it wants to further reduce or waive the charges for social or other factors – like financial inclusivity. In such a scenario, PSOs should ensure that the PSPs’ (banks/PAs) costs are subsidised.

The benefit of a market-driven pricing model is that the costs and business wellbeing of all stakeholders are taken care of.

However, the market-driven model in India lacks transparency in terms of the MDR charges levied to merchants. Another disadvantage is the absence of a slab-based model – similar to debit card MDR – where smaller merchants have to pay a relatively lesser MDR compared to large merchants.

The RBI may choose to partially regulate the credit card MDR by suggesting an upper limit which can be charged to the merchants. This will help in standardising the charges. Due considerations should be made for small merchants and merchants in tier 3 and 4 cities.

Apart from the PPI card issued via card schemes, all other PPIs are not regulated by any other PSO. The MDR of PPI is presently similar to the credit card MDR.

Since PPIs have a lower risk compared to credit cards, we suggest that the MDR for the same could be lower than the credit card MDR. Any value-added services that are provided by the FinTechs or banks can thus be charged for additionally, as subscription or membership fees. As the transaction cost is borne by the merchant and not the cardholder, this charge should not be bundled with the transaction cost.

We believe that the MDR of PPIs should be regulated by the RBI by suggesting an upper limit which can be charged to the merchants.

Merchants pay a consolidated fee for the MDR and any other services they opt for, resulting in simpler reconciliation. A disadvantage of this model is the lack of transparency in the charges deducted, which creates confusion among the merchants.

Unbundled charges with a proper report that mentions all levied charges will reduce confusion among merchants and give them the confidence to accept and adopt digital payments methods. This would enable trust among merchants regarding digital payments and promote adoption of the same in the long run.

PAs charge merchants depending on the level of customisation and other value-added services opted by the merchants. The disadvantage of the existing system is that it lacks uniformity, awareness and transparency across the industry. Different merchants may pay different charges for the same services they have opted for.

The RBI can define the charges for a few basic services required to enable payments acceptance.

Any service offered by the PAs, in addition to the basic services, should be clearly defined and charged for with the prior consent of the concerned merchant. The same should be reflected separately in the reports shared by the PAs to merchants for reconciliation.

Merchants with low-profit margins, like education, utilities, and Government entities (defined by card schemes) are able to pass on the transaction charges to the end consumers. This helps the merchants to avoid incurring additional costs associated with digital payments acceptance. This is useful as merchants will not attempt to recover this cost by including a margin on top of their products or services, which will result in cross-subsidisation for consumers using different types of payments. This means that customers using low-cost payment modes like UPI and debit cards will end up paying the same amount as that being paid by customers using high-cost payment methods like credit cards.

Surcharge results in the end consumer paying more than the actual cost of the product bought or service opted. This may result in dissatisfaction among end consumers and hinder the adoption of digital payments modes by them.

In many countries across the world, central banks have amended the rules regarding surcharges in the past. This is because, sometimes, merchants misuse surcharges to simply pass on the transaction charges to the end consumers, which is an unfair practice. A prominent example is that of surcharging being permitted in Australia. In 2003, the Reserve Bank of Australia required that card brands remove the ‘no-surcharge’ rule that had previously been in effect, as Australia had seen a significant increase in the number of businesses opting to pass on transaction costs to customers.¹⁶

By December 2010, the average rates of surcharges on prominent credit card schemes were 1.8, 1.9 and 4%, while the merchant fees for prominent card networks were only 0.6% and 2.2%.¹⁷ Therefore, in the 2015–16 review of card payments regulation issue, the bank proclaimed that the surcharges must not be more than the amount it costs a merchant to accept a particular type of card for a given transaction.

In March 2015, the European Parliament voted to cap the interchange to 0.3% and 0.2% for credit and debit cards respectively. Subsequently, in November 2015, the Payment Services Directive (PSD2) prohibited businesses from charging customers extra for using credit or debit cards. ^18,19

While surcharges discourage customers from using digital payments platforms, it is important to note that merchants too, cannot consume the high MDR at times. Thus, to strike a balance and prevent both parties from suffering losses, we believe that there should be regulations in place around surcharging, which cap the maximum surcharge. In addition, the merchant’s turnover and ticket size can become relevant factors in determining if the surcharges should be passed on to the customer. For example, a large merchant would not mind bearing the cost of the MDR, and thereby not levy a surcharge, considering the hassle of handling cash for large-scale transactions and the opportunity to handle multiple transactions efficiently.

Convenience charges are presently charged by ticketing aggregator platforms ‘per unit’. Thus, the overall costs for end consumers increase as per the number of seats or tickets booked, while the cost incurred by the merchant for each transaction remains the same, irrespective of the number of seats or tickets booked. From an end consumer’s point of view, convenience fees are not desirable, as consumers end up paying more for the desired product or services.

Since a digital transaction is largely independent of the value of the transaction, there is a disparity in the current charging pattern for the end consumer. One rationale for charging per unit is that when more than one ticket is booked, there is a loss of potential gain for the online service provider from separate bookings that could have incurred the fee.

In our view, the convenience fee should be left to the service provider to decide, and if a fee is charged, the fee should be independent of the payment method. In addition, the price should be market-driven. This will create competition among service providers to offer the best rate to customers, which will ultimately drive innovation and growth in service providers.

Alternatively, to find a middle way to service both end customers and service provider, the latter can charge a convenience fee per unit. However, this must be done in a reducing manner, such that it benefits the service provider as well as the customers. This means that for every unit purchased, the service provider will benefit from the convenience fee charged. However, if several units are purchased, the convenience fee will be less, thereby benefitting the customers.