Okay, joining me now is my first special guest today. Sameer Nigam, PhonePe CEO joins us. Good to have you on the show, Sameer. You've come out strongly in support of the government's decision to have this merchant discount rate of 0.4% above transactions above rupees 2,000, and you believe that this will create, I read somewhere, an enabling system for merchant discount rates. But how do you respond to those who say that the merchants, those who we buy products from above rupees 2,000, will eventually start passing the burden onto consumers, that this is some kind of a consumer tax in a way?
I've been pretty consistent, Rajiv, over the last six years. When UPI started, there was an MDR of 0.65%. People have forgotten how fast the market grew in the first four years as well. It was growing exponentially, and it is only in 2020 during COVID that the government introduced or made MDR free. So as far as we were concerned in the industry, even with MDR, UPI was growing extremely fast, as were, by the way, digital wallets if you remember 10 years ago, which also had an MDR of over 1% at the time. So I think it was a myth to begin with that MDR had to be free for payments to take off. The second thing is that, one, in law it is illegal right now for merchants to transfer the cost to customers. But even in practice, a lot has changed since 10 years ago. We now have almost 60 lakh or 6 million merchants with POS devices in the country accepting credit cards, RuPay cards, wallets, each with an interchange of 1.5 to 2.5%. Debit cards of all sorts in India have an interchange of 0.65% even today. So UPI remains at 0.4% the lowest MDR in the world, not in India, of all networks out there. That's an important thing to learn.
Second, 95 to 96% of the transactions, what are called P2M merchant transactions, are below 2,000 rupees. So for an average person like you or me, on average 95-96% of the time, your daily groceries, your rickshaws, your public transport, all of that, you're not going to be having a merchant getting charged when you make a payment. On the 0.4%, we don't believe that the merchants will charge the customer because they've not done it in the cards or wallet economy or UPI even before this.
Sameer, there are two parts to what you've said. You know, you seem to be suggesting that consumers will not be charged, and based on past experience that it will not be passed on to consumers. But nothing technically stops merchants from passing it on to them. It could be economically feasible for them also. They could do it either through high prices, implicit surcharge. Do you agree with that? Let's get that very clear, that the possibility exists that merchants will pass on any levy on them onto consumers.
Actually, any surcharge linked to paying UPI MDR is illegal through the gazette notification itself, and the NPCI circular explicitly again confirms that. So that burden is on the acquiring banks and payment aggregators like us to ensure that our merchants don't actually transfer any cost to the customer for accepting UPI payments. Now whether they transfer it indirectly or not, I'm again saying I believe that the chances of that are low for the following two reasons. Most of the categories where the margins are very, very thin, like utilities, have already been exempted. Bill payments is capped at 5 rupees. Insurance is capped at 5 rupees. Stock broking is at 0.2%. Petrol is capped at 5 rupees. So there are multiple carve-outs even to this 0.4% MDR where the government has wisely, I would say, said that we will floor the MDR total to a flat number so it remains affordable and is not transferred. The categories where there will be in fact an MDR that is closer to the 0.4% intended are things like retail, clothing, dining, travel, entertainment, which have a much richer margin structure to be honest, and they are already actually getting a large number of credit card paying customers and wallet customers forever. So they were not the ones who asked for zero MDR.
You know, but the point, Sameer, is you're saying majority of transactions by volume are less than 2,000, therefore people will not be affected in any way. But the fact also is, Sameer Nigam, that transactions above rupees 2,000 may constitute only 4% of transaction by volume, but the figures show they actually constitute about 66% of the total UPI value. So transactions of high value, those made at hospitals, hotels, restaurants, retailers as you mentioned, schools, all of this could be potentially under the scanner and therefore that economic impact cannot be underestimated. Do you agree?
True. But again, I would request you, please study the natures that NPCI has provided in this circular. A lot of the categories you mentioned actually have a cap of 5 rupees, not 0.4%, for exactly that reason. Education comes to mind, bill payments comes to mind. Petrol, which is where a lot of spending happens on the consumer side, is capped at 5 rupees. So it is not actually a significant amount. The average petrol pump ticket size is about 600-650 rupees. So the effective MDR at 5 rupees is negligible. So they have looked at the math, and again I say this as an invested party, I would love if it were just very high across the board, but I'm telling you pragmatically this is a right balance. A very large part of that 66% that people are talking about is in categories like insurance, like the capital markets, like petrol, like bill payments, and those are exempted out. They're basically at flat 5 rupees.
You know, may I just ask you, how do you respond to critics like former PhonePe co-founder Ashneer Grover, who created a bit of a stir by saying levying charges on UPI transactions amounts to some kind of tax collection, and this 2,000 rupees threshold is economically arbitrary? How do you respond to the Ashneer Grovers?
