Explained: How 2% MDR on RuPay-UPI may affect credit card industry

According to analysts, SBI Card and Paytm stand to gain the most if RBI agrees to levy 2% merchant discount rate (MDR) on RuPay-based credit cards linked to UPI

The proposed 2 per cent merchant discount rate (MDR) on credit card transactions on the RuPay-Unified Payments Interface (UPI), if implemented, may boost credit card spends and the average customer balance, observes global brokerage firm Macquarie.

“There are roughly 50 million merchants accepting UPI payments, compared to 6 million card point-of-sale (PoS) machines in India. Hence, expanding use-cases bodes well for credit card spend and the average customer balance,” it said in a report dated July 26.

The observation comes after Business Standard reported that the National Payments Corporation of India (NPCI) and banks have suggested levying an MDR of 2 per cent. It is the charge paid by merchants to the card-issuing bank for card transactions.

At outlets with an annual turnover of up to Rs 20 lakh, these transactions will be free, with the ticket size at Rs 2,000-5,000 and no limits imposed on the number of daily transactions.

 

The NPCI’s proposal for an MDR cap needs to be approved by the Reserve Bank of India (RBI).

Macquarie said the penetration of card PoS machines is acutely low in the case of merchants with turnover less than Rs 20 lakh. Such a move could expand the market for credit cards in a big way.

Goldman Sachs, in a June report, had said that the capping of MDR at a lower rate on RuPay-UPI credit cards, especially for lower ticket-sized transactions, could potentially allow credit cards to be accepted by nearly 30 million merchants, as opposed to 3-4 million at present, thus improving their market depth.

According to Deepak Jasani, head of retail research at HDFC Securities, the proposal, if accepted by the RBI, may gradually shift merchants to RuPay-UPI based payment mechanism over the medium-term.

PODCAST: Will UPI on credit cards take off?
 

“Over the longer term, MDR rates may come down. While this may shrink the earnings of credit card players, we need to see if the impact will be offset by a growing number of card users,” he says.

India had 75 million credit cards and 921 million debit cards as of April, according to the NPCI and RBI data.

RuPay cards formed 24 per cent of total (credit and debit combined) card transactions in India in 2021-22 (FY22), or 14 per cent of transaction value.

According to Goldman Sachs, every 5 per cent of incremental credit card transaction volume due to UPI integration will equate to $38 billion in additional annual credit card volumes, or $760 million in additional MDR pool (if MDR is in line with the current credit card MDR). However, MDR could potentially come under pressure if the rate of adoption sees a material increase due to UPI, it said.

Alleviating industry concerns

Macquarie says that the NPCI’s current proposal of 2 per cent MDR for merchants with turnover over Rs 20 lakh (which will be the dominant portion of card-accepting merchants) should ease fears of cannibalising the existing MDR pool for card issuers to a large extent. Moreover, the move also lowers the probability of stringent MDR caps coming through on existing credit cards (from the RBI’s discussion paper), it says.

Key beneficiaries 

Goldman Sachs expects SBI Cards to benefit if parent State Bank of India starts rolling out RuPay-UPI cards to its own customer base.

Paytm, on the other hand, will see a positive impact on its payments segment, it said.

“Increased use of credit cards will potentially result in higher MDR revenue, although Paytm Payments Bank as the acquiring bank will likely be the bigger beneficiary, with some revenue share with One97 Communications (49 per cent shareholder),” it said.

 

Axis Securities, meanwhile, remains bullish on SBI Card, ICICI Bank, and HDFC Bank on the back of robust customer acquisition, market-share gains, and focus on tier II/III cities by companies.

Goldman Sachs expects person-to-merchant digital payments to grow at 28 per cent FY22 through 2025-26 (FY26) compound annual growth rate (CAGR) to reach $1.2 trillion, with UPI reaching $710 billion (37 per cent FY22-26 CAGR), or 64 per cent of total digital payments in FY26E.