To promote payments on debit cards, the Reserve Bank of India (RBI) has proposed new slabs for merchant discount rate (MDR) banks will be allowed to charge merchants, in a draft paper. The RBI floated a concept paper in March 2016 which was looking to increase the card transactions in the country and push card acceptance network.  MDR is an inter-bank exchange fee that banks charge merchants for enabling digital transactions.

“The inputs received for this paper, along with interactions with the industry representatives, has reinforced the felt need for wider acceptance of card payments by merchants in general, with a specific focus on rapid adoption by the smaller merchants,” the RBI added in it the paper.

Note that the RBI has also proposed differentiated MDR between acquiring infrastructure involving physical terminals (POS machines, mPOS etc) and digital acceptance infrastructure models (such as QR codes).  

Following the demonetization of Rs 500 and Rs 1000 notes, up to March 31st, for debit cards, the RBI has allowed banks to charge merchants 0.25% of the transaction value as MDR, for transactions up to Rs 1000, and 0.5% from Rs 1000 to Rs 2000. Earlier, the debit card MDR for banks was capped at 0.75% of the transaction amount for value up to Rs 2000 and not exceeding 1% for transaction amount for value above Rs 2000.

The proposed slabs for debit card MDRs are:
– Small merchants with turnover outside the ambit of GST (turnover less than Rs 20 lakhs per annum)
– Government transactions
– Special category of merchants
– All other merchants with turnover within the ambit of GST (turnover above Rs 20 lakh per annum)

The proposed rates as a percentage of transaction value:

Merchant category Physical POS  Digital POS
Small merchants Not exceeding 0.4% Not exceeding 0.3%
Special category merchants Not exceeding 0.4% Not exceeding 0.3%
All other merchants Not exceeding 0.95% Not exceeding 0.85%
Government transactions
  • Flat fee of Rs 5 for transaction value Rs 1 to  Rs 1000
  • Flat fee of Rs 10 for transaction value Rs 1001 to Rs 2000
  • MDR not exceeding 0.50% for transaction value above Rs 2001 with cap of Rs 250 per transaction

MDR for debit cards for petrol / fuel would be decided after the industry consultation process with Oil Ministry is completed.

Card networks will have to revise the applicable interchange and network fees, preferably on a percentage basis rather than any flat fee basis. Banks will also appropriately rationalize the monthly rentals, if any, recovered from the merchants taking into account the type of card acceptance infrastructure deployed at the merchant location.

MediaNama’s take

The RBI seems to have the right idea by reducing the MDR for debit cards for smaller merchants. After cash, debit cards are the most prevalent payment instrument in the country with over 700 million cards in circulation. However, trouble will start once when it starts looking at digital POS modes such as QR codes. More definition of what constitutes “digital acceptance infrastructure” is needed.

Note that this is only for debit cards and so far only Visa and MasterCard have QR code payments. We had mentioned earlier that QR code payments through card networks are quite convoluted at the moment in India which requires the creation of multiple virtual prepaid cards. Then there are closed systems created by wallet companies and the UPI itself.

The government’s proposal for a uniform QR code for a merchant which involves all card networks is needed. Similarly, it needs to figure out how the unified payments interface (UPI) QR codes will figure into this.