Govt. cuts subsidy for fintechs, banks on UPI transactions

The Union government has lowered the allocation meant for compensating fintech startups and banks that facilitate free UPI transactions, disappointing industry stakeholders who had been demanding a significant increase from last year’s outlay.

The Budget for 2023-24 has proposed an allocation of Rs 1,500 crore for promotion of digital payments. 

This is much lower than the revised allocation of Rs 2,137 crore for 2022-23, which had been bumped up from the earlier outlay of Rs 200 crore after multiple stakeholders, including the Reserve Bank of India, warned that a zero MDR regime would adversely affect the growth of the digital payments ecosystem.

MDR, or merchant discount rate, is the fee banks and payments platforms charge merchants for processing payments on digital wallets and debit and credit cards. In simple terms, for each digital transaction, the merchant pays a certain percentage of the amount, which is then divided among the banks and payment service providers. 

Currently, there’s no MDR on UPI transactions.

The Payments Council of India had sought about Rs 8,000 crore towards MDR support for the coming fiscal year—Rs 6,000 crore for UPI person-to-merchant transactions and another Rs 2,000 crore for Rupay debit card transactions.

“Even though the government has already provided an increase of incentive amount of Rs 2,600 crore under the scheme for promotion of RuPay Debit card and UPI for banks and fintech players, it would have been much supportive if the government could have accommodated the payment industry demand of Rs 8,000 crore incentive,” said Vishwas Patel, Chairman, Payments Council of India, and Executive Director at Infibeam Avenues Ltd. 

In January, the Union cabinet had approved a Rs 2,600-crore incentive scheme for FY2024 for RuPay debit card and UPI transactions. The payments industry is awaiting clarification on this incentive.

Vishwas also said all support money provided by the government was appropriated by banks, leaving nothing for fintech players, including payment aggregators. 

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The industry had also questioned the need to compensate merchants such as Amazon and Flipkart, insisting only small merchants be subsidised.

“The continuity of incentivising digital payment growth is an excellent step by the government,” Vishwas said, “but it is very crucial for the government to ensure that the allocated and disbursed funds reach fintech players. The banks have appropriated the funds, and till date the banks have not given out a single penny to the fintech players.”

Mihir Gandhi, Payments Transformation Leader at PwC India, termed the allocation towards UPI transactions as “way to less” for stakeholders to continue to invest in the technology infrastructure required to keep up with rapidly increasing volumes. 

“We were hoping for the zero MDR regime to change altogether and (for) players to be allowed to charge on these transactions. The current allocation of Rs 1,500 crore would only be able to incentivise small merchants or value-transactions, but won’t cover for the entire industry,” he said. 

Another founder of a payment gateway, speaking on condition of anonymity, said the industry needs about Rs 5,000 crore as UPI reimbursement with transaction volumes surging. 

On average, from 2019 to 2022, UPI transactions have increased 121% in terms of value, and by about 115% in volume terms. In FY 2022, UPI transactions accounted for 52% of the total 8,840 crore financial digital transactions. 

The government had decided in 2019 that there would be no MDR on UPI and RuPay payment modes in order to promote acceptance of digital payments among merchants.

Various payments companies have contested this because of the revenue loss involved. To support the industry and make up for the losses, a part of the allocated amount is expected to be used for the reimbursement of zero charge for UPI and RuPay debit card person-to-merchant transactions.