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Shayan Ghosh

Linking credit cards to UPI to test the zero-MDR regime

The RBI had said that credit cards will now be allowed to be linked to Unified Payments Interface accounts. istock

The phenomenal growth in UPI payments has often been attributed to the zero-MDR policy, with merchants preferring payments through UPI instead of credit cards, they said.

MDR is a charge paid by merchants to banks, card networks, point-of-sale providers for offline transactions, and payment gateways for online purchase. On credit cards, MDR ranges 2-3% of the transaction value.

On how the pricing difference of UPI and credit cards could be synced, RBI deputy governor T. Rabi Sankar said on Wednesday it is too early to talk about the pricing structure and RBI “will see how it will be priced".

Since January 2020, MDR charges are not applicable for transactions via UPI and the indigenous card network, RuPay, and the payments industry has been very vocal in opposing the government policy and has repeatedly sought a roll back, as they believe it would disincentivise investments in the payment infrastructure.

“It is a very interesting development, but ecosystem players need more clarity on it, because in giving credit a cost of funds is involved for issuing banks, while in UPI transactions, MDR is zero," said Vishwas Patel, executive director, Infibeam Avenues Ltd, and the chairman of Payments Council of India (PCI).

The council, Patel said, is reaching out to RBI officials and also speaking to the National Payments Corp. of India (NPCI) to assess how the proposal can be implemented while making it commercially viable. In January, PCI had requested the government to roll back the zero MDR or incentivize the industry with 4,000 crore to bridge the gap.

Adoption of credit card payments via UPI must be watched closely as, under existing regulations, merchants have to pay MDR. According to a Citi Research note on 8 June, it is not clear whether new rules will be announced on MDR for credit card payments on UPI, while credit card payments on other networks will continue to attract MDR.

That said, Citi Research said linking credit cards to UPI could boost card penetration to digital payments, which has been declining because of the popularity of UPI, and could potentially pave the way for improved monetization of mobile or UPI transactions for payment companies.

Kotak Institutional Equities analysts said the merchant has to be made aware that there is a possibility of charges that could be deducted when a credit card is used on UPI QR code. It is believed that a traditional network requires the merchant to agree to both debit and credit transactions but in UPI the merchant has accepted UPI-based transactions.

Allowing credit cards on UPI might lead to fresh agreements with merchants, through the network provider, which implies there could be a pushback if the flow moves more towards credit over traditional UPI, the Kotak report said. There could be different formats of UPI where credit cards may or may not be accepted so that the merchant is free of the worry of MDR charges. Another possibility is changes to MDR (RuPay credit card MDR is similar to other providers) by network providers after discussions with card issuers or acceptors, it said.

“NPCI could solve this challenge if there is a pushback from either party. However, if it tilts towards the merchant (closer to zero MDR), then it would imply card issuers are probably pushing back (on) issuances of RuPay-based credit cards in the short term," the Kotak report said.

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