India to throw $320m at its digital payments ecosystem

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India said that it will spend nearly $320 million under a new incentive scheme to promote the RuPay debit card and low-value UPI transactions to fuel growth of its homegrown digital payments ecosystem.

Under the scheme, acquiring banks will be provided financial incentive for promoting point-of-sale (PoS) and e-commerce transactions using RuPay Debit Cards and low-value BHIM-UPI transactions (P2M) for the current financial year FY 2022-23.

RuPay is India’s homegrown card network, promoted by the National Payments Corporation of India (NPCI). NPCI is a special body of the Reserve Bank of India (RBI) that also oversees UPI payments.

RBI has lately taken a series of steps to expand the reach of RuPay in India.

“This incentive scheme will facilitate building of a robust digital payment ecosystem and promoting RuPay Debit Card and BHIM-UPI digital transactions. In-line with the objective of ‘Sabka Saath, Sabka Vikas’, the scheme will also promote UPI Lite and UPI 123PAY as economical and user-friendly digital payments solutions and enable further deepening of digital payments in the country, across all sectors and segments of the population,” the government said in an official release.

Banks question financial viability of UPI

Last year, India’s finance minister Nirmala Sitharaman shared the government’s intent to continue the financial support for digital payments announced in the previous Budget, with a focus on promoting use of payment platforms that are economical and user-friendly.

The scheme has now been formulated in compliance with her Budget announcement.

With this scheme, India is attempting to alleviate the concerns of banks that have questioned the financial viability of the UPI payments network, which is built by a coalition of banks

Launched six years ago, UPI has become the most popular way for Indians to transact online since it removes the dependence on intermediaries and directly deals with the systems of banks to fetch money from customers’ accounts.

COVID-19 and Zero MDR fuel growth

Over past years, digital payment transactions have recorded tremendous growth. During the COVID-19 crisis, digital payments facilitated functioning of businesses, including small merchants, and helped maintain social distancing. UPI has achieved a record of 782.9 crore digital payment transactions with a value of Rs 12.82 lakh crore in the month of December 2022.

The payments service, however, operates on a zero merchant discount rate (MDR). An MDR is a tiny fee on transactions that is one of the main sources of income for banks and card companies.

The zero MDR has been a key reason for growth of digital payments in India, since offline merchants now prefer it to receive money without any deductions, as India is a value-conscious market.

“The MDR and high upfront and subscription costs is one of the reasons why POS machines and card payments hadn’t gained big ground in India until UPI came along. Since Visa/Mastercard would not agree to zero MDR, India created its own network with UPI and RuPay (on cards) where the government mandated zero MDR — so that small merchants start accepting digital payments and we don’t end up losing 0.25% of our GDP to American companies Mastercard and Visa,” TechCrunch reported citing a fintech executive.

“Various stakeholders in the digital payments systems and the RBI expressed concerns regarding potential adverse impact of the zero MDR regime on the growth of the digital payments ecosystem,” the government said.

India says digital payments up 59%

It mentioned that the National Payments Corporation of India (NPCI) requested, among other things, for incentivisation of BHIM-UPI and RuPay Debit Card transactions to create a cost-effective value proposition for ecosystem stakeholders, increase merchant acceptance footprints and faster migration from cash payments to digital payments.

India said that it is taking various initiatives for promotion of digital payments across the country.

In FY2021-22, the Indian government approved an incentive scheme in compliance with the budget announcement to give a further boost to digital transactions.

“As a result, total digital payments transactions have registered a year-on-year growth of 59%, rising from 5,554 crore in FY2020-21 to 8,840 crore in FY2021-22. BHIM-UPI transactions have registered a year-on-year growth of 106%, rising from 2,233 crore in FY2020-21 to 4,597 crore in FY2021-22,” the government said in the release.

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