Post-MDR, competitive pressure on payment aggregators to increase: Experts

The competitive pressure on various payment aggregators who play critical roles in the UPI transaction flow, will increase dramatically as the government finalises the Merchant Discount Rate (MDR) charge, which merchants will have to pay on high value UPI transactions.

The latest government notification, making amendments in the Payments and Settlement Act, 2007, identifies a segregation in the UPI transaction based on the value and not the type of merchant.

Stakeholders in the UPI transaction ecosystem fear that payment aggregators who are involved in various functions from onboarding of merchants, aiding KYC, risk and security, might lose out when the MDR is finally decided upon.

"There will be lot more competition for UPI volumes and we could see a stage where the margins for payment aggregators will start dropping. If PAs get only about 9 to 10 bps (possibly 25%) of the proposed fee and acquiring and issuing banks get the majority (40%), it may not be ideal, but they will have to go with it," an industry stakeholder said.

In recent years, it has always been viewed that banks in India have not been investing heavily into their UPI-related infrastructure, as there was little to recover in terms of costs. But now they may want to invest more, as they stand to gain heavily once the MDR for large merchants is decided upon soon.

"The latest government move is long overdue and welcome as it will incentivise UPI adoption," an industry source said. Rajesh Londhe, co-founder of Phi-Commerce, a digital payments fintech said: "This was a ray of hope which is now coming through," Londhe explained that once MDR rates are finalised, it will help the fintech recover its costs, linked to infrastructure and operations.

While it is now clear that P2M UPI transactions which are above the value of Rs 2,000 will be charged, industry estimates point that in terms of transaction volume, about 60-80% of the transactions will be below Rs 2,000, but in terms of value, several large-ticket transactions will be credit card based.

Experts were clear that even as merchants will start to face the Rs 2,000 fee charge, it is unlikely that volumes will start to drop. "Maximum UPI transaction even with merchants happen low-ticket size; larger transactions are still credit card based," Londhe told Fortune India.

An industry source said that there may be cases which emerge where a product is priced at between Rs 2,000 –2,100, they may offer to reduce the price, so that the fee is not charged. "But such examples will be few," he said.

He added that this move will still be an overall positive for the UPI ecosystem, where volumes will gain, even as banks, PAs and third-party application providers (TPAPs) will gain. "We will definitely see a scenario where capital will flow towards innovation and strengthening of UPI-linked infrastructure," he said.