Mastercard Finds India’s UPI Painful

Remember that old Bollywood song? “Tujhko Mirchi Lagi To Main Kya Karoon?” Maybe, this is the response that India as a collective needs to give Mastercard CFO Sachin Mehra over his views around how UPI has democratized digital payments but remained a “painful experience” for the ecosystem participants. 

Mehra told the UBS conference the ecosystem participants on UPI end up losing money as part of the engagement. Just so that readers are aware, card providers such as Visa and Mastercard charge merchants a fee for consumer transactions whereas UPI does not charge the merchants anything for the same. 

Companies operating in the FinTech space and their investors have also time and again questioned this model as UPI was set up by a group of banks under direction supervision of the RBI’s National Payment Corporation of India (NPCI), with the aim of enhancing digital payments in the world’s most populous country. 

When money transacts, middlemen make hay?

However, this perspective is questioned by fintech expert and digital entrepreneur Anup Pai who questions the concept of a card provider getting paid for a transaction that he was not responsible for and happened merely because he holds a monopoly. Come to think of it, doesn’t it somehow resemble the “Hafta” payments that local goons take from push-card vendors? 

Maybe, that’s too harsh a comparison. But, Anup Pai thinks otherwise. “Who should make money when I pay at a restaurant? Mastercard CFO disagrees with you if you say no other than the restaurant,” Pai says in a LinkedIn post. He argues that when the buyer and seller are both happy and thriving under the UPI umbrella, as the numbers show, why should Mastercard crib? 

UPI payments are growing and how?

And the numbers do tell their own tale. UPI transactions touched a record in July 2023, both in terms of value and volume. The numbers shared by the government were Rs.15.34 lakh crore in value (up 4% year-on-year) and 996 crore (up 6.6%) in volume during the month. These numbers are regularly shared by the NPCI as proof that UPI has indeed eased payments. 

In fact, UPI transactions have grown by a hefty 40% year on year in value and about 50% year on year based on volumes over the past few years. In fact, the government’s own Economic Survey for 2022-23 noted that UPI transactions grew 121% on average in value and 115% in volume between FY19 and FY22. A recent report by PwC claims that UPI transactions could breach the 100 crore barrier by FY27, though we believe it could happen much earlier. 

So, what exactly is Mastercard’s pain point?

It can be summarized in three alphabets – MDR or merchant discount rates. The government and the RBI have steadfastly resisted imposing MDR on Rupay debit cards and the whole of UPI payments till now. This despite protests by some banks and card issuers who argue that it leaves merchants and issuers with no incentives to deepen the card network. 

In other words, create a debt system where you charge upwards of 30% annually. Forget the ethical issues, but the fact here is that several companies in India have now innovated around UPI and built sustainable enterprise. Take the case of Paytm’s soundbox that offers real-time auditory notifications of transactions. 

It processes UPI transactions at no cost to merchants but charges them a monthly subscription fee or a one-time payment of as low as Rs.999 for using the device. This business has grown fast and is contributing handsomely to Paytm’s bottom line. Why else would Mastercard and Visa partner with them to accept card payments on soundbox? 

It’s a pain, but only for a few

Which brings us to what actually the Mastercard CFO means when he terms UPI payments as painful. According to Anup Pai, it is painful but only for the existing payments ecosystem led by the card issuers cartel. In fact, the RBI recently added to the challenges that card providers would face in India. 

The apex bank recently proposed that banks and card network providers such as Mastercard, Visa and American Express cannot get into exclusive arrangements. Such arrangements, if they exist, would be perceived as anti-competitive and something that could put the consumers at a disadvantage. Privately, the move was seen as India’s way of promoting its own RuPay cards. 

According to the RBI circular issued in July, card issuer banks will have to issue cards from more than one network provider and will also need to give an option to customers to choose any one among multiple card networks. The new rule, as and when it comes, will allow customers to choose their card provider at the time of issue or later. 

Of course, there are those that argue that this was RBI’s push back to its own challenges around RuPay not getting enough global penetration. Be that as it may, the first commitment of a central bank is to its own ecosystem and by seeking to break the monopoly of the card providers, the RBI seems to be following the government’s brief. 

As Anup says in his post, “the ecosystem of sellers and buyers in India are super happy and thriving as the numbers show. And the ecosystem of businesses on #DPI is kicking off innovation at population scale. Something rent-seekers find undesirable. When the population innovates, will a #MDR duopoly sustain? They’d rather complain.

Looks like the Mirchi has done its bit and big-tech monopolies are facing the heat.