SBI Card CEO says linking UPI with credit cards is good but zero MDR isn't feasible

Following RBI’s decision, users will be able to link indigenous RuPay credit cards to UPI, to begin with, with networks such as Visa and Mastercard expected to follow.

However, the UPI transactions linked with a deposit account and a credit card are two separate systems with different financial logic, explains Amara.

"That way credit card is uniquely placed as compared to a debit card or a kind of using UPI and operating on the deposit account — as much as the pre-credit period is there, which is actually funded by the card issuer. So, obviously, that has to be taken into account in terms of pricing. So zero MDR cannot be the situation. That can be the expectation but the reality is that the issuer has to be defrayed for faster funding. So, I think the pricing structure will have to evolve now. We are expecting that consultations will begin between the industry and NPCI, where we are confident that some kind of structure will come out, which balances the interests of all the stakeholders."

Also read: Here’s how to make UPI payments without internet via IVR number with a feature phone

RBI hasn't shared details about MDR and even on June 8 when asked about the pricing model, RBI Deputy Governor T. Rabi Sankar said that "thinking about the pricing structure will be jumping the gun.”

Not just SBI Card's Amara, other experts have also questioned how the RBI will apply MDR for UPI transactions via credit cards.

In a tweet on June 8, market expert and CEO of Capital Mind Deepak Shenoy said, "I don't think UPI linked to RuPay cards is going to succeed if it means making merchants pay for it — merchants will simply stop using UPI, or not allow card payments."

I don't think UPI linked to Rupay cards is going to succeed if it means making merchants pay for it - merchants will simply stop using UPI, or not allow card payments

Credit cards are 60,000 cr. a monthUPI is 10,40,000 cr. a monthOne reason for the 15x - no MDR.— Deepak Shenoy (@deepakshenoy) June 8, 2022

Why is MDR a big issue here? Let's dig deeper.

A merchant discount rate (MDR) is a user fee on every transaction levied by banks and payment service providers on merchants for providing infrastructure to accept digital payments from their customers. The charge is shared between banks and payment service providers such as RuPay, Visa, Mastercard or Amex) involved in the transaction.

Also read: RBI proposes discussion paper on digital payment charges: fintech cos, Paytm may see impact

The government has scrapped MDR on RuPay and UPI transactions since January 1, 2020 (as announced in the Union Budget in July 2019) and it has been a sticking point between the government and digital payment service providers. The decision was taken to boost payments through home-grown real-time payments system UPI at merchant locations, along with RuPay debit cards.

And it did help as since the scrapping of MDR charges, UPI adoption has increased sharply, recording about 504 crore transactions by March 29, as per a PIB tweet. The total digital transaction value shot past the $1 trillion mark in FY22, it added.

#UPI crossed the 500-crore mark in volumes for the first time in March.

504 crore transactions recorded by March 29 itselfDigital Transaction value shoot past $1 trillion mark in FY 22#DigitalIndia pic.twitter.com/ZKACzDnbNg— PIB India (@PIB_India) March 31, 2022

MDR is the key source of revenues for the payments ecosystem — including banks — and credit cards contribute the most. The interest rates on credit cards are very high, usually above 30 percent, making it one of the most profitable businesses for any lender.

Given the costs involved, card networks and banks cannot afford to let these credit card-based UPI transactions occur without any fees. Barring RuPay debit cards linked to UPI, transactions through Visa and Mastercard debit cards too attract an MDR of 1.65 percent for classic cards and 1.85 percent for premium platinum cards or even higher, as per a Moneycontrol.com report.