Assorted credit and debit card machines sit at a payment counter at a Hindustan Petroleum Corp. gas station in New Delhi, India (Photographer: Prashanth Vishwanathan/Bloomberg)

RBI Wants To Cut MDR Drastically To Make Digital Payments More Attractive

In its attempt to “rationalise” the cost of digital transactions, the Reserve Bank of India (RBI) on Thursday released a draft circular proposing a significant cut in the merchant discount rate (MDR) on debit card transactions, while also suggesting a differential rate structure across categories of merchants.

The central bank said this is necessary to bring down the cost and increase adoption of digital payments by small merchants in particular.

The RBI has proposed a differential MDR rate structure based on category of payments rather than the transaction value-based structure that’s currently in place.

Under the proposed structure, merchants will be split into various categories based on their turnover. Those falling under the ambit of GST, that is, having a turnover more than Rs 20 lakh per annum, will pay a rate of up to 0.95 percent for transactions through physical point of sale (PoS) machines. They will pay a lower 0.85 percent rate as MDR for transacting through digital PoS.

Earlier all merchants were charged a flat percentage MDR. Transactions above Rs 2,000 were charged at 1 percent for merchants while transactions below that amount attracted 0.75 percent MDR.

However, the big boost is likely to come for smaller retailers who have a turnover of less than Rs 20 lakh per annum as their effective cost of transaction through the digital medium will be halved if the RBI's proposals are finalised. The MDR for this category of businesses is capped at 0.4 percent for physical PoS and at 0.3 percent for digital PoS.

There is another category of merchants termed “special category” comprising non-discretionary activities. These businesses will also pay the lower rates applicable to small merchants. Companies under this category may include utility providers excluding telecom, hospitals, schools, cooperatives etc.

The central bank also proposes to drastically cut the transaction charge for government transactions and charge a flat fee of Rs 5 for a transaction value between Rs 1 to Rs 1,000. Transactions between Rs 1,000 to Rs 2,000 will carry a flat fee of Rs 10 while transactions above Rs 2,000 will attract MDR not exceeding 0.5 percent.

According to a circular released by the RBI earlier in the day, the government will absorb MDR charges on debit card transactions for payments made to the government and the RBI will disburse the claims to banks.

The applicable MDR for fuel and petrol will be decided after further consultation, the circular added.

While MDR has been often termed as an obstacle in increasing card acceptance infrastructure in India, private players operating in the payments space have not been supportive of regulatory intervention.

In a report published in October 2016, Visa had said that current MDR structures are too low for banks to deploy more infrastructure.

The MDR on small-value transactions is so low that banks find them untenable. In hindsight, the cap on the debit card MDR has predominantly benefited large merchants without any significant increase in debit card transactions. The MDR reduction cost the banking industry an estimated Rs 7.50 lakh crores ($110 million) in revenue in the latest fiscal year, according to an industry estimate as of June 2016.
Visa In Report On ‘Accelerating The Growth of Digital Payments In India’ 

In November, in a conversation with BloombergQuint, Mrinal Sinha, chief operating officer of Mobikwik said that large businesses should pay MDR to make sure that the infrastructure is up and running. He had added that central bank has no business deciding the MDR for the market.

“The regulator shouldn’t be in the business of deciding MDR. I feel that there should be a minimum MDR and then price discovery can happen in the market,” Sinha had said.

Meanwhile, the RBI asked banks and card networks to reduce their fee structure and issued the following guideline.

Card networks shall suitably revise the applicable interchange and network fees, preferably on percentage basis rather than any flat fee basis. Banks shall also appropriately rationalise the monthly rentals, if any, recovered from the merchants taking into account the type of card acceptance infrastructure deployed at merchant location.
RBI Draft Circular On February 16