The Reserve Bank of India has cut down the Merchant Discount Rate or MDR for debit card transactions to 0.75% for transaction amount upto Rs 2,000 and 1% for amount above Rs 2,000. Following the move, merchants will pay reduced charges to banks, on low value debit card payments. Earlier, the MDR for debit and credit cards was same in India, going upto 2.5% per transaction. The central bank hopes that the move will encourage offline and online merchants to accept debit cards over credit cards, and the banks’ losses in terms of the rate cut would be compensated by the increase in transaction volumes. The directive which was supposed to have been implemented from 1 July will be implemented from 1st September due to some operational issues.

In a letter to managers,chairmen and CEO’s of all the banks in India, chief general manager, department of payment and settlement systems, RBI Vijay Chugh issued the following statement”

The Merchant Discount Rate (MDR) for debit and credit cards has hitherto been similar in India. The debit card is a secured product with the card usage being linked to the availability of funds in the accounts of the customers. Credit cards, on the other hand, are a part of the unsecured credit product portfolio of the issuers. The credit card usage is linked to the credit limit sanctioned by the issuer and carries with it an element of credit risk. Thus given the different nature of the two products, there is no rationale for having a similar MDR for debit and credit cards. Further, it is observed that debit cards are mostly being used for withdrawal of cash at ATMs.

2. Given this scenario, it is necessary to encourage the use of debit cards, especially at smaller merchants/service providers and location by way of lower MDR. This move would encourage all categories and types of merchants to deploy the card acceptance infrastructure and also facilitate acceptance of small value transactions. Further, in the case of the acquiring banks, a certain element of guarantee on the Return on Investment (ROI) is required for deepening the card acceptance infrastructure. A lower MDR with the expected increase in transaction volume on account of network effects would result in a reasonable ROI for acquiring banks.

3. Accordingly, in consultation with the stakeholders, it has been decided to cap the MDR for transactions undertaken with debit cards as under:

(a) not exceeding 0.75% of the transaction amount for value upto Rs 2000/-;
(b) not exceeding 1 % for transaction amount for value above Rs 2000/-.”