Industry Hopes That Higher Volumes Will Dull The Impact Of Lower Fee On Debit Cards

The pain of the proposed lower fee on debit card may be reduced if transaction volumes pick up due to the lower cost of digital payments, said industry participants a day after the Reserve Bank of India (RBI) proposed a cut in charges. Some, however, cautioned against excessive interference from the regulator saying that frequent changes are creating uncertainty within the industry.

In draft guidelines released on Thursday, the RBI suggested that the merchant discount rate (MDR) on debit cards be cut, particularly for small merchants. If the guidelines are finalised, businesses with less than Rs 20 lakh turnover per annum will be paying MDR of not more than 0.4 percent of the transaction value, as opposed to 1 percent currently. The regulator said that rationalisation of MDR will bring down costs and prompt merchants to adopt digital payments.

The regulator’s proposals were in contrast to the stance adopted by a recent committee on digital payments headed by Ratan Watal, which had said that MDRs should be left to the market to determine. A different committee, headed by Andhra Pradesh chief minister Chandrababu Naidu had, however, suggested that MDRs be done away with.

Naveen Surya, chairman of the Payments Council of India and co-founder of digital payments firm ItzCash, told BloombergQuint that cutting MDR could disincentivise banks and card companies to go out and acquire new merchants.

Surya added that the RBI is making too many changes in policy which increases uncertainty and leaves little room for the market to function and find optimal pricing.

Mastercard and Visa declined to comment on the RBI’s proposals.

MDR is the total cost of digital payments borne by the merchant. This includes the network fee, switching fee and the fee charged by the card issuing bank. In some cases, payment aggregators and payment gateway services also get a share of the MDR.

By capping MDR, the RBI is trying to ensure that the overall cost of a digital transaction for a merchant comes down, as this cost is often cited as an obstacle in moving away from cash. In the aftermath of demonetisation, the government has been pushing citizens to reduce the use of cash and move towards digital payments.

While the change in fee structures is bound to create some uncertainty for the industry, Pralay Mondal, Group President for retail and business banking at YES Bank told BloombergQuint that if the volume of transactions rises substantially, the ecosystem will benefit.

Harshil Mathur, chief executive officer and co-founder of Razorpay, a payment gateway, is not sure it will work out that way.

Mathur added that since the RBI has only capped the final rate, there is room for negotiation between the card networks and banks on sharing of fee. “This could further squeeze margins for the acquiring bank as issuing bank and card networks are likely to demand a larger share in the pie, he said.

The RBI in its guidelines is also trying to segment the market by setting differential MDRs for digital and physical point-of-sale systems. It also proposed lower fee for essential services which will attract the same cost structure as small merchants.

The central bank is trying out new structures to gauge how the market and industry performs, a former RBI official told BloombergQuint on the condition of anonymity. The success of this move hinges on an increase in the volume of digital transactions as banks will only be able to make the same amount of money from MDR if overall transactions rise, said this official.

Demonetisation led to a jump in digital transactions in the month of November and December but as cash returned, the value of transactions dipped by about 7 percent in January. In a note published on Friday, Sonal Varma, chief India economist at Nomura Global Research wrote that maintaining the momentum of digital payments may be tough.