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Reduced MDR charges to boost digital payments in India

Digital payments are expected to grow in October as the National Payments Corporation of India (NCPI) has decided to rationalise BHIM-UPI MDR for merchant transactions.

BHIM-UPI stands for the Bharat Interface for Money-Unified Payment Interface and is an instant real-time payment system developed by NCPI that facilitates inter-bank transactions. The Reserve Bank of India (RBI) regulates the interface and it works by instantly transferring funds between two bank accounts on a mobile platform.

According to a release, NCPI has capped the merchant discount rate (MDR) for large ticket transactions at a maximum of IN ₹100 (US $1.39) and reduced it to zero at offline merchants for transaction up to IN ₹100.

MDR is the commission charged to a merchant by a financial institution for payment processing services on debit and credit card transactions. A merchant must set up this service and agree to the rate before accepting digital payments.

The MDR has been revised to 0.30% with a maximum cap of IN ₹100 per transaction.

Currently, MDR is capped at 0.25% for transactions up to IN ₹2,000 (US $27.76) and at 0.65% for transactions above IN ₹2,000. Also, MDR for offline merchants, where transactions are done through QR Scan and Pay, will be zero for transactions up to IN ₹100. The new MDR rates will come into effect from 1 October 2019.

An NCPI official said that the Zero MDR for transactions up to IN ₹100 and increased limit for the P2PM (peer-to-peer merchant) category (small merchants) will help faster migration from cash to BHIM UPI.

The lower MDR will encourage all categories and types of merchants to deploy the asset-lite acceptance infrastructure (BHIM-UPI QR code) to grow its digital footprint across the country.

According to an NPCI report, the number of UPI transactions hit a record 918.3 million in August, growing nearly 12% sequentially.

On a year-on-year basis, transactions have surged 194.3%. There are 141 banks live on UPI compared with 21 banks at the time of its launch three years ago.

The increase in transactions can be attributed to the fact that it allows users to transfer money anytime, on a real-time basis, across multiple bank accounts without putting out details of the beneficiary’s bank account.

2018-2019 saw 5.4 billion UPI-based transactions compared with 4.4 billion debit card payments. These transactions overtook debit card payments, indicating wider payment options for consumers and a shift in consumers’ choices and digital payment preferences. Apart from UPI, debit cards, National Electronic Fund Transfer, and prepaid payment instruments like e-wallets and Internet banking are other popular e-payment options.

In 2017-2018, UPI transactions totalled 915.2 million compared with 3.34 billion debit card transactions.

The government has been pushing for the digitalisation of payment methods in the country. In fact, the NCIP is looking to use blockchain technology to make digital payments more robust and efficient.

It plans to develop a resilient, real-time, and highly scalable blockchain solution for digital payments, which have grown exponentially over the last few years. It has proposed to develop this solution using an open-source technology framework.

The implementation of blockchain technology will reduce dependency on a central engine operating the payment infrastructure. Also, immutable databases promise more efficiency and security, which reduces frauds. Blockchain technology stores information about transactions between users in a way that can be tracked by any user at any time, which ensures maximum transparency.

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