In the past few months, a lot has been debated about the move to ZeroMDR for RUPAY and UPI payments. People in the industry have to think out of the box to figure out a viable business model for payment acceptance. The government also has to play a key role in squaring the business model for all players and this will be key to a successful and smooth transition for the country.
The Journey of Digital Payments
Historically, digital payments around the world have been driven by the American model defined by the card associations, characterised by:
● Merchant Discount Rate (what the merchant pays)
● Issuer interchange (what the credit-card issuing bank makes)
● Switching Fees (what Visa or MasterCard makes for providing the guarantee of settlement to the merchant)
Gradually the ATM card evolved into the debit card and was introduced as a payment instrument in the US in the early 1990s. In the late 1990s, the internet as a medium of commerce and bill payments created a new opportunity and the US payment associations figured out a way to allow cards to be used online.
Fast forward to 2010, the last major innovation from the developed markets came in the form of the Mobile POS (Point of Sale) revolution, allowing card payments to be accepted with smartphones and low cost accessories.
At around the same time, emerging markets were forced to innovate because of a few important factors:
● The cost of merchant acquisition (onboarding, device/servicing costs, etc.)
● Lack of access to institutional credit due to lack of credit ratings
As such the industry stayed with cash, or had to devise models based on debit/prepaid wallets. Two other models were taking birth around the world:
1) The Telco-led wallet model of mPesa which took the Kenyan market by storm.
2) The Alipay and Tencent/WePay led SmartPhone + SuperApp + Static QR strategy that won the Chinese market with a deviceless model.
Despite their huge success over the past 15 years, they have neither been replicable by the same companies nor have they been copied anywhere else with similar success.
India: Pioneering open, interoperable real-time payments
In 2017, India launched the Unified Payment Interface (UPI). One of UPI’s biggest innovations was the Four-Party-Model that allowed for payments to be embedded and distributed via a range of applications that had nothing to do with banking and payments but had large-scale distribution. UPI was based on core-banking rails from the get-go and had three unique and core tenets:
● Interoperable, near-zero cost, real-time payments
● Financial institution led – but with ample opportunities for distribution via partners from other ecosystems, notably mobile/Internet companies
● Static QR code-based acceptance with the option to evolve to other methods including dynamic QR or non-QR based models
UPI has seen an astounding growth with more than 1 Trillion transactions being processed in its 3rd year. It has been so successful in India that governments around the world are studying this model and are keen to collaborate and replicate it. While UPI’s growth has been nothing short of breathtaking, digital payments still constitute less than 10 percent of retail transactions in India.
ZeroMDR — the Business Model Shift
In an attempt to further increase digital payments in India, the government has been pushing the industry to innovate in distribution and business models – urging and now mandating that MDR should go to zero. This has caused a great deal of concern amongst banks and payment service providers whose business models have, in several cases, been turned upside down. Additionally, there are significant costs associated with digital payments and infrastructure and operations.
The government believes that banks should be bearing this as it reduces the overall cash management cost and increased digital deposits. However, the government is probably going to be the biggest beneficiary of digitization in the short-run and one quarter believes that the government should step in and ensure that the ecosystem remains viable.
Nonetheless, it is clear that payment service providers have to get creative and it will be exciting to see how the ecosystem adapts. The new world will require solutions that solve other adjacent problems for merchants in order to make payment processing viable and attractive. There will be a few incumbents who will lose out in the short run but there’s no question that newer models will emerge and payment acceptance in India will create a new world order in the next 2-3 years, one that will be replicable around the world over the next 5-7 years. The payments industry will go through dramatic changes in the coming years and India will lead the way. The rest of the world is watching and the success of these new products, technologies and business models in India will lead to massive changes worldwide.