79. UPI Update — MDR, PPI, LoC
UPI reduced the usage of coins (I do not have proof but it’s a reasonable assumption).
Let’s say, if people need coins (e.g., a shopkeeper or Uncle Scrooge) then they can get it from banks’ vending machines. Basically, you put in currency notes and the vending machine gives coins.
Now, RBI is running a pilot where users can scan QR using UPI App and get the coins!
On one hand UPI is reducing coins… but when people need coins, they can use UPI. In nutshell — UPI is a remedy for all problems… kind of Aloe Vera of payments world.
In this article, I will talk about MDR on PPI, challenges and line of credit. So let’s start!
A. UPI + PPI and plenty of ‘unnecessary’ confusions
NPCI announced that UPI transactions done from PPI wallet above Rs.2000 will attract an MDR of 1.1%.
That statement created a lot of confusion… And few news outlets used misleading headings (typical clickbait tactic) and LOLs (Leaders of LinkedIn) stepped in to give ‘Gyaan’…. All in all, a lot of noise.
Let’s understand what is this all about.
What is MDR?
MDR (Merchant Discount Rate) is the fees applicable for transaction processing. It is applicable for different types of payment modes (Credit cards, debit cards, wallet, Net-banking etc.)
Depending on MCC (merchant Category code) and payment mode, the MDR can be % (percentage) of transaction value (e.g. 1.1%) or flat fee (e.g., Rs.1 per transaction)
Note: MDR attracts 18% GST
MDR is either borne by merchant or customer — there are three models
For the majority of the sectors/merchants, the MDR works in an upfront dedication model with few exceptions such as Government, Education, NBFCs (few) and B2B merchants. So as a consumer, you do not have to think ‘much’ about MDR while ordering food or mobile.
MDR on UPI:
As per GOI mandate, MDR on UPI is zero (since Jan ‘2020) for all types of transactions — P2P (Person to Person), P2PM (Person to small merchants) and P2M (person to merchants).
A consumer is not bearing any MDR on UPI. If you see any charges that means the merchant is on a surcharge model and its payment partner is charging some fee.
Merchants usually bear some charges as Payment Partners charge a small fee in the name of infrastructure or TSP fee (they never call it ‘MDR’)
UPI + Payment Source:
Back in 2020, UPI was allowed only on savings accounts and overdraft accounts.
But now a UPI user can connect to different sources (RuPay Credit Card, PPI Wallet, Line of Credit etc.) to do UPI Payments. So ‘zero MDR’ won’t apply to all types of sources.
Depending on the source of payment, there are certain limitations in usage and MDR (Refer table below)
Note: I have not included an Overdraft account (No MDR), NRE/NRO account (most likely there won’t be any MDR) and line of credit model (which is recent development — so awaiting clarity)
I hope that clarifies MDR on UPI from consumer point of view.
MDR Implementation on UPI+CC and UPI+PPI
It is clear who will bear MDR (i.e., merchant in majority of cases) but the question is ‘how efficiently’.
At present, PAs/Acquiring banks cannot identify whether the user has made the transaction through a bank account or UPI+CC or UPI+PPI. So the MDR cannot be applied in real-time (meaning: Payment Aggregator cannot apply MDR during transaction and deduct it from merchants in real-time).
So PA has to raise a monthly invoice once they receive details from its acquiring banks (but so far this process is not streamlined)
Note: Once the process is clear then I will update this section
Can merchants decide whether to allow UPI+CC and UPI+PPI?
- A typical P2PM merchant (neighbourhood shop or tea stall) may not be but again, such transactions are less than Rs.2000 so there is no MDR.
- Many merchants do enable credit cards and wallets so why not UPI+CC and UPI+PPI?
- Merchants where CC and wallets are not accepted (e.g.,mutual fund, NBFCs) will not allow UPI+CC/PPI and this will be a blocked basis MCC.
If NPCI allows merchants to decide whether they want to accept UPI +CC/PPI then acquiring banks and TPAPs need to build mechanisms to block them on the basis of merchant configurations… Firstly, that is a lot of work and also, it defeats the purpose of popularising UPI+CC/PPI.
A lot of ifs and buts… and a lot of work to be done in educating consumers, making sure commercials are applied in real-time… so this space will keep evolving and I will keep updating this section!
B. UPI Commercials
“There are no free lunches”
That is the case with UPI as well… Government declared that MDR is zero but the payment ecosystem (banks, FinTech, PAs) incur costs (e.g., infrastructure, people) for running UPI.
Considering the cost, the Government decided to subsidise UPI (and RuPay debit cards). Last financial year (2022–23), GOI spent Rs.1044 Cr and allotted Rs.1500 Cr for FY 23–24.
What happens is — for transactions below Rs.2000, GOI gives ~22 paisa per transaction to banks. And banks do not have to pay GST on this incentive.
I will skip the topic whether banks are sharing subsidy with FinTech/PSPs (They are not) and whether the subsidy is sufficient (definitely not)
C. UPI + Line of Credit:
UPI can be linked to Line of Credit
That means, now UPI can be linked to 7 different types of instruments (refer illustration 1 — above)
What is line of credit?
“A line of credit (LOC) is a preset borrowing limit that can be tapped into at any time. The borrower can take money out as needed until the limit is reached. As money is repaid, it can be borrowed again in the case of an open line of credit.” — Investopedia
This move was anticipated when NPCI announced linking of Credit Cards to UPI.
Think about it… A credit card is a line of credit from the bank that is enabled through a card (physical form factor) in partnership with a network (who provides acceptance infrastructure). Of course, credit card comes with goodies (reward points, discounts, cashbacks etc.) which are typically funded by banks and network (To know more — Read this article)
Banks provide the line of credit and UPI provides the acceptance infrastructure.
If banks can earn ‘interchange’ or ‘MDR’ similar to that on credit cards then banks will not only promote it but also fund offers (discount, cashback).
UPI+Line of Credit will provide ample opportunities for banks/FinTechs to experiment around embedded lending/BNPL products.
It is interesting to see how this space will evolve!
