Lower merchant discounting rate may hit digital infra build-up, say analysts

The Reserve Bank of India's (RBI) proposal to lower the Merchant Discounting Rate (MDR) will deter banks from making investments into technology for building the payment infrastructure.

MDR is the charge that merchants pay banks for every electronic payment in lieu of the infrastructure that banks have put up.

If the MDRs are reduced, customers will definitely be benefited. But many suspect that the reduction in MDR may, in turn, force banks to bundle up charges to recoup their investments and keep the charges opaque.

The proposals, analysts said, are complicated and the all-important MDR for petrol pump transactions have been left untouched, pending discussions with the oil ministry.

RBI has proposed charging debit card transactions on the basis of merchant turnover rather than the present slab rate based on transaction value. It is to encourage small-value digital infrastructure such as QR-code (payments without a swipe machine). MDR on transactions (ex-government) made via digital PoS (point of sale) terminals has been aligned at 0.1%, lower than ones done on physical PoS terminals.

Rajnish Kumar, managing director, SBI, told DNA Money, "SBI is fine with the rates, but identifying merchants' turnover may be difficult."

MDR on small merchants (turnover of less than Rs 20 lakh) will be 0.4% and 0.3% for physical and digital PoS respectively. In addition, special category merchants (hospitals, army canteens, education institutions, utilities including private sectors) will be treated as small merchants irrespective of turnover.

For all other category merchants, MDR will be 0.95% and 0.85%. However, MDR on government transactions will be flat – Rs 5 up to Rs 1,000, Rs10 up to Rs 2,000 and 0.5% above Rs 2,000 with a cap of Rs 250.

Another public sector banker said, "We will have to expand the cable network as there will be more digital payments, and with fingerprints also being recognised at merchant establishments, the existing cables have to be broadened to carry the heavier data, all of this requires additional cash. But if the MDR rates are reduced then banks may be forced to recoup the money as transaction costs from customers."

MDR was revised for January-March 2017 due to demonetization. If we take out this special exemption, MDR currently is 0.75% for transaction up to Rs 2,000 and 1% for transactions above Rs 2,000.

Religare Securities said this move would impact the fee-based income of banks. Card charges (including credit card charges and annual charges on debit cards -- unchanged) constitute 15-17% of fee income for large-sized retail-focused private banks. Fee income will get impacted in the short term but with a pick-up in volumes long-term impact is likely to be neutral.

Jefferies, a research firm, said, "Our initial assessment of this draft circular suggests that its approach is an immature approach to address the larger issues related to the card payment systems. While it reduces MDR for certain category of customer and the government, and this, the framework has not addressed the larger issues of opacity and bundling of charges by banks."