Imagine a scenario without banks, everyone earns and spends in cash. There are no charges to be paid to anyone. If you are supposed to earn 100 Rs for a service offered, you would earn 100 Rs and when you purchase an item or service worth 100 Rs, you would pay 100 Rs for the same. Merchant earns the exact amount paid by the customer without any deductions in the process. Now this merchant collects bundles of cash everyday so he needs to spend money in handling that much cash. Maybe he will have to buy a secure vault to store it or even hire a security guard to protect it all the time. When he is transporting all that cash, he needs to spend on secure transit. All that would cost merchant some money, which has been the justification for charging MDR. Acquirer told the merchants, by accepting payments digitally we will manage the cash worries for you hence saving you huge cost in the process thus you should compensate us by way of paying us in the form of MDR.
However the problem is, in India only banks are allowed to be the acquirers, who are the custodians of all the money. That means customers as well as merchants keep their money in the books of the banks, meaning cost of transferring the money digitally is much cheaper compared when compared to cash for banks. Since the banks are custodians of all the money and they have the option to reinvest that money primarily by way of lending it to borrowers and charge interest on that money. Typically banks charge anywhere between 8% (home loan) to 36% (credit card roll-over) on the money they lend and a small portion of that around 3% (Savings A/C) -7% (Term Deposits) is passed on to the customer. Rest of the money is supposed to be spend on various expenditures of running the bank. These expenditures should also include building, managing and maintaining the entire payment infrastructure. A fee for allowing customers to access their own funds (on these very funds the entire bank is existing) in any form is unfair.
Specially in case of UPI, cost of merchant acquiring is almost zero. Instead of a PoS machine, which costs somewhere between 1500 Rs (mPoS) to 20,000 Rs (fancy PoS devices with multiple other supporting features) a UPI merchant needs a QR code, which can be printed and attached to a fancy plastic display in less than 100 Rs. In case of PoS, transactions are settled in two steps, authorization and settlements thus requiring an operations team to manage the reconciliation and payments processing, while in case of UPI the transaction is settled real time directly in merchant’s account hence the need for large operations teams and systems is eliminated. I do not have any numbers to compare on disputes/chargebacks but the going by the fundamental design of UPI, the possibility of disputes in UPI are much lesser compared to card world hence requiring even lesser operational expenditure.
When a bank outsources their ATM management business to a third party partner, they pay that third party. The third party is not expected to make fee income from customers. Similarly CC Avenue, Razorpay, Pinelabs of the world should be treated as third parties whom banks have outsourced the job of setting up merchant infrastructure and banks should pay these players for the services rendered at fair price, like they would for any other technology or operations outsourcing partner. Banks are making enough money to pay for this service. Based on some figure being floated around in various media sources I have learned that this zero MDR for RuPay and UPI will put burden of around 1800 Cr on the industry. Can someone remind me the profit made by HDFC Bank in last quarter?
In fact I am saying why should it be applicable for selective merchant base, this should be the case across all merchants. Our banking system is capable enough for paying for their service in order to get the balances from these merchant in their current accounts so that they can make float income on that money.
Another logic given to merchants for demanding MDR is that a card in the hand of customer increases his/her purchasing capacity hence increase in sales for the merchant. That logic primarily applies for Credit Cards and the current mandate leaves them untouched. Maybe a better way to go for banks would be to push Credit Cards. India is still super under penetrated when it comes to credit product and the scope is enormous. The business Bajaj Finance has built on EMI product is proof enough that banks have been failing miserably in exploiting this opportunity. My suggestion would be that banks get their act together, get off their high horse and start optimizing their processes and utilizing their resources better to find efficient ways to increase their revenue by serving their customers better rather than trying to build a fee income. In fact I would rather worry about a bank that is earning a significant portion of their revenue from various fees.
Having stated above, the way most of the players in the market are approaching this entire thing is flowed in my opinion. Banks are refusing to compensate the third party payments processors creating a huge dent in their revenue thus leaving them no choice but to compromise on their core business by creating other parallel businesses in order to generate sustainable revenue streams, which in the long run will be disastrous for the overall payments business. Ideally since banks are the only parties making money from the circulation of money during transaction should own up to their responsibility and compensate the payment providers fairly for their contribution in creating the ecosystem for bank’s customers to use the funds he/she has parked in the bank seamlessly; the way they would compensate any other service provider of theirs.
Above proposed arrangement is a significant shift from common practice prevalent for years, hence expecting such shift overnight would be a folly. Keeping that in mind I propose as an interim arrangement government bears part of the burden with a clear roadmap and visibility towards banks owning the entire cost in due course. Banks are clearly at the seat of power here and instead of exploiting their position to gain more profits and fee income they should instead invest and work for overall growth of digital economy. This move, even if forced should force banks to become more efficient in their processes and start using customers’ data optimally in order to maximize their gains.
Gaurav Tiwari's Blog 
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