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‘Potholes on the digital payment superhighway’

Published: 26th Oct, 2020

In Budget 2020-21, the government prescribed zero Merchant Discount Rate (MDR),


  • A major thrust toward large value payments was effected through the Real Time Gross Settlement System, or RTGS, launched by the RBI in March 2004.
  • The large value payments on stock trading, government bond trading and other customer payments were covered under the RTGS, providing finality of settlement, thereby reducing huge risks such as the Harshad Mehta scam; besides this, it substantially reduced the time taken for settlements.
  • The RBI introduced National Electronic Funds Transfer, or NEFT, and bulk debits and credits to support retail payments around the same time.
  • Now, NEFT is available round the clock and RTGS will follow from December 2020, only a few countries have achieved this.
  • The finance minister said the government has already amended two laws, Income Tax Act and the Payments and Settlement Systems Act, 2007, to give effect to these provisions.



  • National Payments Corporation of India (NPCI), an umbrella organisation for operating retail payments and settlement systems in India, is an initiative of Reserve Bank of India (RBI) and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, for creating a robust Payment & Settlement Infrastructure in India.
  • NPCI has been incorporated as a “Not for Profit” Company under the provisions of Section 25 of Companies Act 1956 (now Section 8 of Companies Act 2013), with an intention to provide infrastructure to the entire Banking system in India for physical as well as electronic payment and settlement systems.
  • Some of the payment services of NPCI are as follows- NFS, IMPS, AePS, CTS, RuPay, UPI, Bharat BillPay, NETC, BHIM, BharatQR, BHIM Aadhaar Pay

Merchant Discount Rate (MDR)

  • MDR is usually 1% to 3% of the overall transaction and is the rate charged to a merchant for payment processing services on debit and credit card transactions. 
  • MDR is required and necessary because it funds the acquiring system and helps players deploy service QR codes and service the merchants.
  • It is the cost which is paid to banks and payment service providers (PSPs), during a transaction.
  • It is important for laying down UPI acceptance infrastructure and critical for servicing and spread of the UPI in the country.
  • MDR is the only source of revenue for the (UPI) ecosystem.

What NPCI had to do?

  • NPCI had to revise the interchange fee and PSP fee to zero for debit card payments through RuPay and for UPI payments in the country, leaving UPI payment apps and players with no revenue model around the infrastructure.

Expected Benefits                              

  • The business establishments with annual turnover more than Rs 50 crore shall offer such low-cost digital modes of payment to their customers and no charges or Merchant Discount Rate shall be imposed on customers as well as merchants.
  • Indigenously developed digital payment medium like RuPay and BHIM UPI will now have edge over the payment gateway promoted by foreign companies.

Drawbacks of the decision

  • This has also caused several large players to move away from expanding the acceptance of UPI in the country, questioning its monetisation model.
  • The waiver of the merchant discount rate(MDR) on digital payments will slow down its deployment in the country.
  • Major banks and payment companies were expected to transfer a percentage of their proceeds from fees accrued from processing digital payments to grow the payments infrastructure in Tier 3 and 4 parts of the country. But now they will be discouraged to invest in this field.
  • Around half a billion dollars is needed in MDR for the UPI ecosystem to sustain servicing cost and compliances around Know-Your-Customer (KYC) norm, which payment companies are expected to comply with. Now the burden will fall on the payment service providers.
  • The government left out other providers of digital payment products from this MDR prescription, which is unjustified and had adverse effects. 
  • Taking advantage of this dualism, many issuing banks switched to mainly Visa and Master cards for monetary gains. 
  • It resulted in indirect market segmentation and cartel formation.

Government and RBI Role

  • Zero MDR can work out very well for the growth of the fintech industry but had additional expectations from the governmen
  • The government has to offer around INR 2000 Cr for the upcoming fiscal year, to compensate banks for the revenue loss incurred due to MDR charges.
  • The Reserve Bank of India earlier this year had set up a Payment Infrastructure Development Fund of Rs 500 crore to support the sector, reeling under the loss of revenue, in deploying devices in rural geographies.
  • RBI and banks will absorb these costs from the savings that will accrue to them on account of handling less cash as people move to these digital modes of payment.


The Digital mode of payment system has been crucial for the real time transfer and instant services. It had played an important role in inclusive growth and development in the form of direct benefit transfers for government schemes. The need is to promote the home driven technology and to make rules and policies more competitive for the domestic products. In this wake the decision to make Zero MDR has to be taken by considering all the players and with active government and RBI participation.

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