It is possible that the fees levied on credit card transactions will eventually come down, either through central bank intervention or otherwise. And the reintroduction of fees on the Unified Payments Interface (UPI) could perhaps offset the impact of reduced card fees for banks, industry participants said.
That said, the Reserve Bank of India (RBI) has not taken any position at this time, so the overshoot of the Merchant Discount Rate (MDR) will continue until the final guidelines are issued, they have declared.
The MDR is the rate charged to a merchant for payment processing services on various payment instruments.
The RBI’s discussion paper on fees in payment systems, released on Wednesday, seeks to structure its policies and streamline the framework for fees for different payment services or activities, such as UPI, Immediate Payment Service (IMPS), NEFT (National Electronic Funds Transfer), RTGS (Real-Time Gross Settlement) and payment instruments, including debit cards, credit cards and prepaid payment instruments (PPI).
The RBI has sought feedback from stakeholders by October 3 on the possibility of imposing “tiered” fees on payments made through the UPI based on different ranges of amounts. If UPI transactions are charged, should MDR be charged based on the value of the transaction or should a fixed amount be charged as MDR regardless of the value of the transaction? He also sought comments on whether the RBI should decide on fees or whether the market should be allowed to determine whether fees are introduced.
“Industry players have been eagerly awaiting the reintroduction of fees on UPI as there is a cost attached to undertaking such transactions,” said Mihir Gandhi, Partner and Leader (Payments Transformation), PwC India.
“If a fee is imposed, it will be good for the industry and help banks build better infrastructure for booming volumes. From a long-term perspective, it’s the right thing to do because a service cannot not be offered for free indefinitely. Initially, the RBI and NPCI may need to establish some ground rules regarding the pricing structure,” Gandhi said.
Jaikrishnan G, Partner (Financial Services Consulting) at Grant Thornton Bharat, said fees on UPI transactions were unavoidable. “It would be ideal for the RBI to introduce an upper cap from a consumer protection perspective, but not regulate pricing as such. The market will determine the right price through healthy competition and customer appetite across different segments and payment types.
Currently, no costs are incurred by users or merchants when paying through UPI. However, collectively, stakeholders incur Rs 2 for processing a UPI-P2M transaction, with an average transaction value of Rs 2. Experts have warned that there could be an impact on UPI transaction volume if charges were introduced.
Vishwas Patel, Chairman of the Payments Council of India (PCI), said: “…the pricing of financial instruments could be left to market forces to continue to support the necessary investment and innovation in digital payments.”
He said the growth of digital payments has been largely driven by payment aggregators. They have suffered a collective loss of over Rs 25,000 crore over the past four years in promoting and popularizing digital payments, especially UPI and installing PoS terminals and QR codes across the country. Although the central government provided Rs 1,500 crore for fee reimbursement for RuPay and UPI debit card transactions, none of the money reached the payment aggregators.
The RBI has not issued any regulatory mandates or intervened on the MDR on credit cards, but has sought comments from stakeholders. Nowhere in the world has a central bank intervened to regulate the MDR/interchange fee applied to credit transactions.
“There are many considerations to take into account like the cost of funds for the bank issuing the card, the cost of issuing plastic cards with NFC and other security protocols, the NPA on non-recovery amounts from cardholders, etc. As an industry body, PCI will discuss, debate and provide detailed feedback to the RBI within the requested time frame,” Patel said.
The RBI has suggested a formula to regulate MDR on credit cards. The MDR of credit card transactions is equal to that of debit card transactions (first cost), plus the average rate for 30 days of credit from a few major banks (second cost) assuming that a customer has a average free credit period of 30 days on a credit card transaction.
“…the formula suggested by the RBI should maintain the MDR at >1.2-2% v/s ≥ 2% now. Our rough work suggests that a 10 basis point reduction in MDR/interchange fees could reduce card companies’ RoA by at least 50 basis points,” Emkay Research said in a note Thursday.
“Our quick discussions with card players suggest that the RBI can either leave the MDR on credit cards/wallets determined by the market or encourage players to reduce interchange fees slightly. That said, the reintroduction of MDR on UPI should partially offset the impact of reduced card fees for banks/wallets for fintechs but not for non-bank card companies (like SBI Cards), unless that they do not engage in UPI transactions,” he said. . Shares of SBI Cards plunged 4.34% on Thursday to Rs 957.60 on the Sensex following RBI’s working paper on fees in payment systems.
Kotak Institutional Equities, in a research note, said the RBI document was largely silent on reward points.
Suresh Ganapathy, Managing Partner of Macquarie Capital, said transaction fees should eventually be reduced for customers (individuals and merchants) and the cost should be borne by banks, fintechs, NBFCs, payment aggregators and service providers. “Banks can digest the impact even better because they have always used payments as an acquisition engine and have never made a lot of money. The main challenge would be for various other intermediaries who do not have the necessary balance sheet to leverage acquired customers,” Ganapathy said.