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Union Budget 2023-24: Government reduces subsidy for Fintechs, Banks on UPI Transactions

• ByStartupStory     |    February 2, 2023

In its Union Budget 2023-24 announcements, the government reduced the subsidy intended to compensate fintech startups and banks that facilitate UPI transactions.

The government has reduced the incentive allocation for fintechs and banks by nearly 30%, from INR 2,137 Cr in the previous budget to INR 1,500 Cr.

In fact, the government only set aside INR 200 Cr as a subsidy to compensate UPI players in the 2021-22 budget. However, industry stakeholders, including the Reserve Bank of India (RBI), have warned that the move could harm UPI growth. As a result, the government increased the incentive scheme’s budget by more than tenfold in 2022-23.

The Payment Council of India, on the other hand, had requested a total MDR support of INR 8,000 Cr – INR 6,000 Cr for UPI transactions and the rest for RuPay debit cards.

Fintech startups require incentives to stay in business; because UPI lacks a merchant discount rate (MDR), the players bear the costs of running the infrastructure that enables UPI transactions.

MDR is a small fee charged to merchants by banks and fintech players for accepting payments via digital wallets, debit and credit cards. In other words, the merchant pays a percentage of the amount for each digital transaction, from which banks and payment service providers take their cut.

This fee, which is typically less than 2%, enables fintech startups and payment gateways to operate in a sustainable manner. While a zero MDR policy has aided the growth of digital payments in the country, India’s UPI ecosystem is nearing maturity.

The idea of charging MDR on UPI transactions resurfaced recently after the RBI issued a discussion paper on “Charges in Payment Systems” in August last year as a litmus test for public opinion on UPI charges. According to the RBI, the cost is passed on to the merchant as MDR or to the customer as transaction fees.

However, the backlash was so strong that the Finance Ministry was forced to clarify the situation on Twitter, stating that the government has no plans to implement MDR on UPI transactions.

The government also announced a separate INR 2,600 Cr scheme in January this year to incentivize fintech startups and banks to enable small-value UPI and RuPay-BHIM transactions.

For FY23, the scheme will incentivize digital payment enablers to facilitate payments of less than INR 2,000. For the time being, the industry is waiting for more clarity on the scheme.

 

 

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