The Reserve Bank of India (RBI) has decided to cut the merchant discount rate (MDR) for debit card transactions. The issue of merchant discount rates has been debated since demonetisation which led to an increase in card transactions. While transaction volumes increased, it was argued that such transactions remain more expensive than cash due to the high MDR.
Addressing that concern, the RBI said that MDRs would be rationalised.
“With a view to giving further fillip to acceptance of debit card payments for purchase of goods and services across a wider network of merchants, it has been decided to rationalise the framework for Merchant Discount Rate applicable on debit card transactions based on the category of merchants,” said the RBI.
Under the new rules, the MDR for smaller merchants would lower. Small merchants are defined as those who had a turnover of less than Rs 20 lakh in the previous financial year.
- For small businesses, the MDR cap would stand at 0.4 percent or Rs 200 per transaction, whichever is lower.
- For other merchants, the MDR cap will be 0.9 percent or Rs 1,000 per transaction, whichever is lower.
Presently, the merchants have to pay a blanket MDR of 0.75 percent for card transactions up to Rs 2,000 and 1 percent for transactions worth higher.
Merchant discount rate is charged to a merchant by a bank, for providing debit and credit card services. Essentially, any merchant with a point of sale terminal at its shop has to pay MDR to banks for every transaction made through it.
Apart from differential MDRs across categories of merchants, the RBI has also introduced different rates based on the kind of infrastructure at use. For QR code based acceptance infrastructure, the MDR will be 10 basis points lower across both merchant categories.
- For small businesses, the MDR cap at QR code based infrastructure would stand at 0.3 percent or Rs 200 per transaction, whichever is lower.
- For other merchants, the MDR cap at QR code based infrastructure will be 0.8 percent or Rs 1,000 per transaction, whichever is lower.
The changes in MDR followed a draft paper released in February which had recommended lower rates for smaller merchants as a way to expand the penetration of card payments. At the time, the proposal was opposed by digital payments companies which said that low rates would disincentivise banks and other third party providers from putting card acceptance infrastructure in place.
Data from the RBI shows that debit and credit card payments at point of sale terminals have increased from Rs 35,240 crore in November 2016, compared to Rs 47,980 crore in November 2017.