Processing payments and financial inclusion are societal imperatives, no doubt. But they are not part of the social guarantee net. They are businesses, and last I checked, free still remains a famously difficult model for making money.
Zero MDR: A One-Two Blow To Financial Inclusion
The push towards Zero is driving what could be a healthy business ecosystem towards the lowest common denominator of a single business model: that of monetizing data. Ethics and privacy aside, while this works great in spaces where the incremental marginal costs of acquiring a new user are minimal, this push is leaving a substantial portion of the country behind as the cost of infrastructure needed to support them fails to be supported by the direct revenue potential. What is needed here is free-market economics, what we are getting instead is a strange cocktail of capitalism watered down by socialist intent.
MDR (or Merchan Discount Rate) was a victim to this ideology in Budget 2019. MDR is a fee charged to a merchant for accepting card payments and helps compensate the value chain enabling the transaction (like the card issuer and the PoS terminal provider and operator). Discounting MDR to zero is something nobody sought: and there is no social benefit to it. Let us set aside the fact that MDR in India has already been heavily regulated, and that despite the heavy regulations, businesses have found ways to survive and even turn profitable. Or the fact that the razor-thin margins ill-afford a player in this space to engage predatory tactics: like price gouging.
Let us, in fact, accept zero MDR as a fact. How then do the businesses in the space make money? The answer to the consumer is simple. As the adage goes, if it’s free: you are the product.
And when the consumer is the product, the game is big data. An opt-in by default choice is being on behalf of the consumer: if you want to transact using electronic payments, you will have to deal with the fact that the only viable way for the business making that transaction happen is for them to trade on your personal information. And unfortunately, that is a choice not many of us are engaged or sophisticated enough to opt-out of.
Consequence two of Zero MDR is more permanent: despite the boom in FinTech funding in India, the painful truth is that very few companies are in the black yet. A lot has to do with thin margins endemic to the sector. The reason we still feel the FinTech euphoria and are unaware of the pain under the surface is that the $18 billion or so in VC money that flowed into space is keeping the mood ebullient. But the party will stop if these businesses don’t start making money.
One way of making this money would have been to embrace ‘financial inclusion’ in its fullness and go the last mile to those remote parts of the country: the Bharat behind India. The only way that would be viable would be for companies to be allowed to charge higher MDRs for going there, at least in the short term: to justify both the effort required to develop these markets, and to reflect the lower transaction values and volumes they would attract - a relaxation we have in fact been advocating as an industry for years. Instead, the guillitone of Zero MDR has fallen and made that entire conversation moot.
Who then would be left to go there: to include Bharat in India’s financial markets? Inevitably, it will have to be someone for whom payments is a feature, not a product. A nice to have something to keep the engagement journey going.
In short: if you don’t want to make money through MDRs, you really aren’t in the business of payments. Processing payments and financial inclusion are societal imperatives, no doubt. But they are not part of the social guarantee net. They are businesses, and last I checked, free still remains a famously difficult model for making money.