Will the Decision of National Payments Corporation of India to remove Merchant Discount Rate affect innovation in fintech sector? Examine (200 Words)
Refer - Business Standard
Enrich the answer from other sources, if the question demands
IAS Parliament 5 years
KEY POINTS
· The National Payments Corporation of India (NPCI) revised bank interchange fees for the Unified Payments Interface (UPI) to zero for all domestic transactions with retrospective effect from January 1, 2020.
· This cut is the inevitable consequence of the finance ministry’s decision to cut the merchant discount rate (MDR) to zero on the UPI and RuPay transactions from January 1.
· Banks cannot pay interchange fees on these transactions, since they are no longer receiving fees from the MDR. The decision assumed that the removal of the MDR will lead to a further upsurge of digital transactions
· The removal of the MDR is expected to encourage smaller merchants to adopt digital payment systems, since they will not have to pay charges to banks or fintech service providers.
· But the MDR was a key revenue stream and its removal has hit the industry hard. There will be negative consequences in terms of the growth of the digital payments ecosystem.
· But despite that income stream, the major fintech players are all incurring losses because their expenditures on both creating front-end and back-end infrastructure are high and they also have to offer cashback and other incentives in a competitive space.
· Merchants paid the MDR to their respective banks as a fee for accepting digital payments via the UPI, RuPay cards, and other instruments.
· The banks pay interchange fees, network fees, and payments service provider fees to other banks, fintech players, and stakeholders in the ecosystem. The NPCI also takes a fee for enabling UPI and RuPay transactions.
· Hence, the MDR was a source of revenue for many entities and a major one for some businesses in the digital value chain. In the absence of the MDR, there will be very little incentive for fintech players to expand their network by registering new merchants and users.
· Investors will also be unwilling to spend more on maintaining and strengthening existing networks, leading to higher transaction failure rates and probable frustration among users.
Raj 5 years
Kindly review please. Thanks
