RBI cuts MDR charges in debit card push

To make electronic payments easier, Reserve Bank of India (RBI) has reduced the merchant discount rates (MDR) on debit cards based on the category of merchants. MDR is the fee charged to a merchant by a bank for providing the infrastructure to facilitate the use of debit and credit card payment services.

RBI has asked banks to ensure that merchants on-boarded by them do not pass on the MDR charges to customers while accepting payments through debit cards. The new MDR rates will come into effect from January 1, 2018.

"In 2016-17, the percentage of usage of debit cards at point of sales (PoS terminals) was at 21.9% and now it is almost at that stage. So we thought that it is about time that a further push is given to that and one of the ways we thought we can help achieve the objective is rationalisation of the MDR," deputy governor B P Kanungo said in a post policy press conference.

Under the new rates, the small merchants (with turnover of less than Rs 20 lakh in the last financial year) cannot be charged more than 0.4% per debit card transaction, and MDR paid to the bank cannot exceed Rs 200. For QR code-based card acceptance, merchant charge will not exceed 0.3% of the transaction value with a cap of Rs 200.

For merchants with a turnover above Rs 20 lakh (during the previous financial year), MDR will not exceed 0.9 % per debit card transaction, and MDR paid to the bank cannot exceed Rs 1,000. For QR code-based card acceptance, merchant charge will not exceed 0.8% of the transaction value with a cap of Rs 1,000.

Following demonetisation, the RBI in December last year capped the MDR charges at 0.25% for transactions up to Rs 1,000.

In the post demonetisation period, there has been a significant jump in the digital transactions at the PoS with debit cards transactions, both in value and volume, outpacing the credit card transactions at PoS. To give an additional push, RBI has rationalised the MDR charges on debit card transactions based on merchant turnover and type of infrastructure (PoS/QR Code).

SBI's Ecowrap said in a report, "The moot question is whether a differentiated MDR will incentivise the merchants to accept debit cards. It may be noted that banks have invested a huge amounts of money on setting up payment infrastructure in the country. We hope that the rationalisation of MDR charges will reignite debit card transactions at PoS and this increase in volume will outstrip any possible loss on the part of the banks."

The concept of MDR was introduced by RBI in 2012 to incentivise the use of debit cards rather than the credit cards which was an unsecured product. RBI had said then the debit cards were used to withdraw cash from ATMs, which would then be used for purchases. It was then that RBI decided to increase the PoS infrastructure to encourage usage of cards at merchant establishments.

"However, we would have preferred to have it based on interchange. This definitely should be good for SMEs to adopt digital payments. We would need to bear with two short term challenges one of IT implementation on the cap of MDR and second the ability of payment players including banks to quickly validate the merchant turnover while boarding merchants. All in all, it is definitely a progressive step to have more and more merchants adopt digital payments over PoS, Online as well as QR," Dewang Neralla, co-chair, Merchant Aggregator and Acquirer Committee of PCI & CEO Atom Technologies, said in a release.