The Payments Council of India (PCI) has said that banks are yet to reimburse the Merchant Discount Rate (MDR) to payment companies, despite having received the necessary subsidies from the government to do so. MDR is the charge paid by a merchant to a bank for facilitating a digital transaction, and is a percentage of the transaction amount.

In December 2017, the Indian government started a scheme to reimburse Merchant Discount Rates on transactions up to Rs. 2,000 to promote digital payments. This scheme was applicable for two years from January 1, 2018 on all transaction made through debit cards, BHIM UPI or Aadhaar Enabled Payments Systems (AEPS).

Is the MDR losing monetary value midway?

According to PCI, which has around 100 payments firms as its members, the payments industry is concerned that banks will only pass on a small proportion of the MDR reimbursements to payment companies, while retaining the bulk of it themselves. Consequently, this will impact the operating ability of these firms as MDR is a major source of their revenues, a statement from PCI said.

The payments body estimates that around 80% of all debit card transactions by volume and 60% by value, involve amounts under Rs 2,000. However, the time period from which these numbers have been taken remains unclear. Regardless, this translates to a significant amount of MDR revenues that the payments companies have yet to receive. According to PCI, this is on top of the high costs and low margins ecosystem that the payments companies already operate in. Setting up payments infrastructure, as well as supporting small merchants in remote areas of the country require significant expenditure, but has low returns, the statement said. 

PSU banks’ non-compliance will kill micro transactions

Contrary to the government’s directive, major Public Sector banks like State Bank of India have announced that they will not reimburse for transactions made via Debit Cards for amounts below Rs 1000, said Vishwas Patel, Chairman of the PCI. “This will kill micro transactions as it will make processing below Rs 1,000 totally unviable for our non-banking merchant aggregators and acquirer members. Over all, MDR reimbursement taking such a long time and fear of not getting sufficient share from banks is a major concern area right now for all our members,” said Patel.

In June, we reported that banks are not paying payment companies their due of MDR. At the time, we reported that around Rs 500–600 crores were stuck at various processing stages, and more importantly, that banks hadn’t received that subsidy from the government.