A positive spin-off of the increasing digitalisation of human activity is an explosion in digital payments. An RBI appointed committee on the subject chaired by Nandan Nilekani concluded last year that in a space of five years, per capita annual digital transactions rose from 2.4 to 22. In keeping with finance minister Nirmala Sitharaman's proposal in her first budget last year, the process of eliminating Merchant Discount Rate (MDR) began this year. MDR is a catchall term which encompasses the range of fees collected by different entities which make a digital transaction possible. This step needs to be seen in the context of the constraints existing in India's digital payments ecosystem.
There is a strong supply of products and options to complete transactions without the use of cash. The challenges come from a degree of reluctance on the part of merchants to bear MDR and network issues. An administrative fiat to eliminate MDR is an ill-conceived idea. Many firms which form a link in the chain of digital transactions depend on it to run their operations. In the absence of revenue, they will wither away. Some firms in this chain will, in the absence of transaction fees, look to trade on the customer data they collect. In the absence of a monetary incentive, commercial operations are implausible. The government, if it wants to eliminate MDR, should use its resources to offset the costs incurred by the firms engaged in the backend of digital transactions.
Another option for the government is to look at ways to complement the Unified Payments Interface (UPI), which created a game changing backend digital payments infrastructure. UPI was created by National Payments Corporation of India, an initiative of RBI. Another step government needs to take is to reduce costs related to KYC norms, which was recommended by the Nilekani committee. The best way to promote non-cash methods is to create a light-touch regulatory framework which will allow disruptors an opportunity to both lower costs and introduce innovations. This will work better than administrative fiats which trigger unintended consequences in most cases.
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