MDR continues to suppress RuPay credit card growth

Notwithstanding the concerted push from the government and the Reserve Bank of India (RBI), the UPI-linked RuPay credit card has been stifled by lower adoption among merchants.

“The primary challenge for a credit card on the UPI is charges levied to merchants for transactions above a certain threshold,” says Vivek Iyer, partner, Grant Thornton Bharat. “Considering that credit card as a product is used for high-value transactions, levying the merchant discount rate (MDR) limits the adoption by merchants as well as customers.”

The MDR is a fee charged by banks for processing transactions. The fee is usually a percentage of the total transaction amount and is used to cover the costs associated with processing payments. The MDR is typically between 1% and 3%.

The lacklustre growth in UPI-linked RuPay credit card, even after more than a year of its rollout, is all about an understanding between merchants, banks and credit cardholders. Though 13 banks and 15 payment service providers are live with the feature, the problem continues.

To address this issue, the Reserve Bank of India earlier this month directed card issuers to provide an option to customers to choose from multiple networks at the time of the issue. Also, card issuers shall not enter into any arrangement with networks that restrain them from availing of the services of other card networks.

The RBI’s notification came at a time when there has been an uptick in demand for RuPay credit cards in tier II, III and IV cities and towns. A report by fintech platform ZET suggests that the demand grew 37% quarter-on-quarter in July-September across 706 towns and cities.

Considering the linkage to the UPI, experts acknowledge that a sizable share of customers may opt for RuPay as their preferred network. However, merchant adoption remains a challenge.

“While UPI through account transfer has been free for merchants, there is a small fee for credit cards on UPI,” Sunil Rongala, senior vice president, head – strategy, innovation and analytics, Worldline India. Merchants who enjoy free transactions on UPI are hesitant to pay for credit cards on UPI, he said.

In June 2022, the RBI allowed the linking of RuPay credit cards with the UPI, making it the only UPI-linked network.

On October 4, 2023, the National Payments Corporation of India (NPCI) announced that interchange fees would be applicable on RuPay-UPI transactions, but small merchants would be exempt from it. This meant that the interchange fee would be levied on transactions worth more than `2,000. Currently, peer-to-merchant UPI transactions do not attract a fee and are more palatable to merchants. These transactions typically have a ticket size of less than `2,000.

On the other hand, the levy of the MDR on larger-ticket size transactions done through RuPay credit cards has discouraged merchants from offering it as a payment option, say experts. Currently, an MDR of 2% is levied on UPI-linked RuPay credit card transactions. Of this, 1.5% goes towards the card issuing bank while the remaining is shared between the card network and the merchant acquiring bank.

Experts note that in the case of other card networks, merchants are able to leverage on their partnerships with banks and negotiate for a lower MDR. But in the case of RuPay, the merchant is often acquired by UPI companies like PhonePe, Google Pay, and Paytm, which are less flexible on the MDR. Here, the merchants use the QR codes and soundbox devices provided by these entities.

“The point is that they did not set up the entire RuPay network fully in accordance with industry standard,” says Bhavik Hathi, managing director, Alvarez & Marsal.

The solution to this problem is rationalisation of the MDR, according to market participants. This will lead to a a level playing field for all the participants. While there is no definitive way to reduce the MDR at this point, discussions around the pain point have started.