Counter 1: Small mechants will pay very little MDR anyway.
Little in comparision to what? Zerodha's profits? While that would be true, a 2-3% MDR on 10-15% net margin business means 20% of what merchant could take home. Even at 0.3% for someone earning 20,000 that is a cost of 600 - one less pizza treat for a family every month!
Counter 2: Bigger companies have more capacity to absorb.
The public market pressure will make big corp's knees weak. Instead of more capacity to absorb, focus should be on more bargaining power against consumers who will ultimately bear the brunt. Manufacturers can easily include 2% in pricing but small traders who have little say in MRP & margins will lose out.
Also, for a fast forward we can look at countries ahead of us. Merchants push it onto customers. "2% extra charges on cards", it reads at most mom-pop shops in London.
Which discourages digital payments.
Unpopular Opinion:
The cost of digital payments will not come from directly charging for them at either end, it will come from second order effects of digital payments.
Second Order Effects:
1. Not losing out on purchase occasion when customer is not carrying cash.
Increased spending > Increased business > more tax collection
2. Leaks prevention in govt welfare schemes.
3. (For Banks) Paper Trail to access credit risk > increased lending > increased profits.
4. Lower remittance charges (digital payments diplomacy) > more net net money in India.
Punch Line: Free Digital Payments lauch a virtuos cycle of cash flow.
P.S., Nerdy take for fellow economists: Digital payments can in theory help solve fishers identity because we can finally see the velocity of cash!
To tell you the truth, we aren't sure what to think. It's a hard problem.
The network probably only exists at the scale that it does because of the zero MDR policy. At the same time, we're not convinced that banks and payment service providers should bear all the costs (or costs minus subsidies, even) for this system to exist. Your point on the second-order effects is well taken (and can even be extended further; for instance, UPI > more account activity > higher float and balances), but we're not sure they compensate entirely for these costs.
That said, we haven't seen any of the actual math. We're just piecing things together from publicly available sources, and those can be quite spotty.
To pick your brains a little, if you'll allow us:
1. If there were a limited MDR (say 0.3%) for transactions over a certain transaction size (say INR 2000), would you still disagree as vehemently?
2. What do you think about the subsidies the government offers? Should those be larger?
No vehement oppositions here on sub (that's for instagram), that's just my writing style.
Just taking an economist lens to disect the problem and pointing out some contradictions.
Fair Disclaimer, I haven't run the numbers either but have a theory.
On the pointers here is what fires in my head.
1. If I were in think tank advising govt on UPI, I would strongly oppose introduction of MDR even at 0.3%. . .until a certain milestone.
Better question framing would be: Free UPI until when?
I think second order effect benefits can easily pay off the first order cost of free UPI payments until let's say 80% digital penetration. At that stage, I believe most of the second order benefits will be captured. I no longer would fear stunting the growth of Indian Economy at that point and would be comfortable with MDR.
2. Short answer,Yes definitely much much larger.
The biggest benefactor is the govt. In fact, Govt should take up the entire load of the network.
That being said, there is an opportunity for private players to again build second order effects on UPI, accessing credit worthiness based on transactions, spend behaviour, all that data ought to fine-tune their offerings, reduce NPAs, penetrate deeper into credits. India is no where close to a good level of credit usage. Banks have an opportunity and Govt is fair to ask them to pay to participate in this opportunity.
The almighty MARKET, will play its role and get Govt & Banks will find the perfect ratio of kitty contri.
Thanks for the discussion, gotta get back to work!
Counter 1: Small mechants will pay very little MDR anyway.
Little in comparision to what? Zerodha's profits? While that would be true, a 2-3% MDR on 10-15% net margin business means 20% of what merchant could take home. Even at 0.3% for someone earning 20,000 that is a cost of 600 - one less pizza treat for a family every month!
Counter 2: Bigger companies have more capacity to absorb.
The public market pressure will make big corp's knees weak. Instead of more capacity to absorb, focus should be on more bargaining power against consumers who will ultimately bear the brunt. Manufacturers can easily include 2% in pricing but small traders who have little say in MRP & margins will lose out.
Also, for a fast forward we can look at countries ahead of us. Merchants push it onto customers. "2% extra charges on cards", it reads at most mom-pop shops in London.
Which discourages digital payments.
Unpopular Opinion:
The cost of digital payments will not come from directly charging for them at either end, it will come from second order effects of digital payments.
Second Order Effects:
1. Not losing out on purchase occasion when customer is not carrying cash.
Increased spending > Increased business > more tax collection
2. Leaks prevention in govt welfare schemes.
3. (For Banks) Paper Trail to access credit risk > increased lending > increased profits.
4. Lower remittance charges (digital payments diplomacy) > more net net money in India.
Punch Line: Free Digital Payments lauch a virtuos cycle of cash flow.
P.S., Nerdy take for fellow economists: Digital payments can in theory help solve fishers identity because we can finally see the velocity of cash!
Hey Shivam, great points!
To tell you the truth, we aren't sure what to think. It's a hard problem.
The network probably only exists at the scale that it does because of the zero MDR policy. At the same time, we're not convinced that banks and payment service providers should bear all the costs (or costs minus subsidies, even) for this system to exist. Your point on the second-order effects is well taken (and can even be extended further; for instance, UPI > more account activity > higher float and balances), but we're not sure they compensate entirely for these costs.
That said, we haven't seen any of the actual math. We're just piecing things together from publicly available sources, and those can be quite spotty.
To pick your brains a little, if you'll allow us:
1. If there were a limited MDR (say 0.3%) for transactions over a certain transaction size (say INR 2000), would you still disagree as vehemently?
2. What do you think about the subsidies the government offers? Should those be larger?
No vehement oppositions here on sub (that's for instagram), that's just my writing style.
Just taking an economist lens to disect the problem and pointing out some contradictions.
Fair Disclaimer, I haven't run the numbers either but have a theory.
On the pointers here is what fires in my head.
1. If I were in think tank advising govt on UPI, I would strongly oppose introduction of MDR even at 0.3%. . .until a certain milestone.
Better question framing would be: Free UPI until when?
I think second order effect benefits can easily pay off the first order cost of free UPI payments until let's say 80% digital penetration. At that stage, I believe most of the second order benefits will be captured. I no longer would fear stunting the growth of Indian Economy at that point and would be comfortable with MDR.
2. Short answer,Yes definitely much much larger.
The biggest benefactor is the govt. In fact, Govt should take up the entire load of the network.
That being said, there is an opportunity for private players to again build second order effects on UPI, accessing credit worthiness based on transactions, spend behaviour, all that data ought to fine-tune their offerings, reduce NPAs, penetrate deeper into credits. India is no where close to a good level of credit usage. Banks have an opportunity and Govt is fair to ask them to pay to participate in this opportunity.
The almighty MARKET, will play its role and get Govt & Banks will find the perfect ratio of kitty contri.
Thanks for the discussion, gotta get back to work!