Zero merchant discount rate (MDR): Peer-to-merchant (P2M) volumes more than debit cards

As Vivek Belgavi, partner & leader – fintech, PwC India, said, the upswing in UPI P2M has come from the digitisation of offline merchants by payments and even non-payments players.

That the value of peer-to-merchant (P2M) transactions through Unified Payments Interface (UPI) has exceeded that of transactions made using credit cards or debit cards at points of sale (PoS) is much the result of the zero merchant discount rate (MDR) regime. Innovations in merchant alert systems have also done a lot to boost merchant transactions over the channel.

UPI had been known more for running up high volumes in peer-to-peer (P2P) payments with the P2M piece accounting for 20-30%. That seems to have changed with social distancing norms and lockdowns across the country compelling a chunk of people to make payments digitally.

As Vivek Belgavi, partner & leader – fintech, PwC India, said, the upswing in UPI P2M has come from the digitisation of offline merchants by payments and even non-payments players. “In parallel, there are companies trying to provide supply chain solutions. Between those two trends, we could expect more growth going forward,” Belgavi added.

The zero MDR regime has seen small merchants prefer UPI over other modes of digital transactions. Besides, companies like Paytm and PhonePe have come up with solutions like the Soundbox and voice alerts, respectively, which give the merchant an instant audio notification for a successful transaction. As Mandar Agashe, founder, MD & vice-chairman, Sarvatra Technologies, says, obviously these offer greater comfort than other payment modes. Highlighting a change in consumer behaviour, Agashe said for transactions under Rs 1,000, most people now prefer to pay using QR codes. “The other factor is the unique UPI features, where you can pay for your cable connection and even invest in an IPO. These are huge volume drivers,” he said.

It is now common to make QR-based UPI payments at smaller roadside restaurants where bill amounts are relatively small. There is greater confidence now QR codes would be available for payments even if you step out without a card or any cash. Anand Kumar Bajaj, founder, MD & CEO, PayNearby, attributes the rising share of UPI P2M by value to the fact that fewer people are using credit cards for impulse buying. “Now it is much more convenient to scan a QR when you are out. Another factor along with convenience is the cashback story. That is being substantiated not only by the rise in UPI transactions, but also by a fall in ATM transactions,” he said.

Credible data on the coverage of small merchants by UPI QR codes is not available but a significant majority may have been covered. Now, more consumers need to use it. However, since regulations require a new UPI user to own a debit card, this excludes a fairly large number of consumers. Agashe of Sarvatra Technologies believes the next phase of growth will depend on whether people can use UPI without a debit card. “That will lead to massive adoption all over again. Right now only a very small section of people is using UPI and there is scope for growth at least for the next five years,” he said.

PwC’s Belgavi believes the existing debit card base can be better utilised for UPI adoption under the umbrella entity (NUE) model. “We do have a lot of debit cards already in India. The challenge is more in terms of activity and activation. A lot of people do not know how to use them beyond ATMs. As we see new players coming in through the NUE model, we could see new methods of acquiring to drive transactions and greater awareness,” he said.

In December, UPI recorded 950.45 million P2M transactions worth Rs 68,170.15 crore. In volume terms, P2M transactions accounted for 42.5% of all UPI transactions and in value terms, their share stood at 16.4%. The volume of credit card swipes at PoS machines in December was 174.21 million and their value was Rs 63,600.57 crore. Debit card transactions were to the tune of 379.18 million and the value stood at Rs 64,676.11 crore.