Banks have told the National Payments Corporation of India (NPCI) that in the absence of fees from merchants, lenders can’t reimburse companies such as PhonePe and Google Pay that process and accept digital transactions on their behalf.
At the centre of this demand is New Delhi’s decision to remove the Merchant Discount Rates (MDR) for all digital transactions made through UPI and RuPay instruments, a federal move that has annual cost implication of 2,000 crore for the lenders.
In a letter to NPCI, the Indian Banks Association (IBA) has said fees from merchants making digital transactions were necessary to help sustain the expansion of digital modes of transaction.
“The IBA managing committee has decided that in respect to zero MDR…zero interchange is acceptable to the banking industry, and NPCI should be requested to consider zero interchange, zero switching fee, and zero fee for the payment service providers (PSPs) while implementing the government mandate,” said the IBA letter to NPCI CEO Dilip Asbe. ET has reviewed a copy of the letter dated January 22.
Interchange fee is the charge commanded by the customer’s bank from merchant’s bank in processing digital transactions. This was previously capped at 0.15 percent of the transaction amount on UPI payments. Switch fee is the fee paid by banks to network operators, such as NPCI.
The Interchange fee, the switch fee, and the PSP fee – the charge paid by banks for the services of payment companies – constitute a significant portion of the MDR.
To be sure, payment companies have said that such a move may risk the collapse of the digital payments ecosystem, and that several companies relying solely on these fee incomes will have to shutter their businesses in the absence of a viable revenue model.
A source told ET that several companies have not received any fees from banks for more than 20 days since the zero MDR regime began in the New Year. “PSPs play a vital role in growing digital payments and if this (fee) is not paid, these companies will start withdrawing the existing deployed POS terminals from unviable small shops and establishments,” said the Payment Council of India (PCI) in response to ET’s queries.
Both IBA and PCI are industry bodies that represent the banking and payments industries, respectively.
Earlier this month, as reported by ET, a six-member PCI representation that included Paytm chief Vijay Shekhar Sharma had met finance minister Nirmala Sitharaman to seek compensation on potential losses due to zero MDR.
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