The Reserve Bank of India rationalized the merchant discount rate (MDR) on debit cards and has set up a differentiated regime if the transaction occurs on a physical POS machine or it occurs on QR codes through the BharatQR. MDR is an inter-bank exchange fee that banks charge merchants for enabling digital transactions.

Accordingly, the MDR for debit cards will be:

Small merchants (with a turnover up to Rs 20 lakh during the previous financial year) will have to pay a maximum of 0.4% of a transaction on a physical POS or online. This will be capped at Rs 200 per transaction.
Small merchants who use QR code-based card acceptance infrastructure such as BharatQR will have to pay 0.3% of a transaction. This will be capped at Rs 200 per transaction.
Other merchants (with a turnover of over Rs 20 lakh during the financial year) will have to pay a maximum of 0.9%. This will have an MDR cap of Rs 1000 per transaction.
Other merchants who use QR code-based card acceptance infrastructure such as BharatQR will have to pay 0.8% of a transaction. This will be capped at Rs 1000 per transaction.

However, payment companies and retail associations say that the latest order from the RBI will have a detrimental effect on the spread of POS machines and usage of debit cards. Here is what they are saying

Vishwas Patel, CEO of CC Avenue

While Patel welcomed the reduction in the overall reduction of the MDR for debit cards and felt that it would help in getting smaller merchants onboard, he expressed that the RBI could have made sure that the MDR distribution should be more equitable between participants of a digital transaction.

“Currently, the interchange is heavily loaded in favour of Issuing side as they take away more than 90% of the MDR thereby leaving negligible margins for the acquiring sides. Currently, there are only 2.9 million POS terminals against more than 800 Million debits cards issued in India and if RBI ensures equitable distribution of MDR margins between all parties than the acquirers will have enough resources to deploy the expensive POS terminals across all establishments in our country and thus help grow digital transactions,” Patel said in a press note.

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Dewang Neralla, CEO of Atom Technologies

Neralla said that he would have preferred it if the RBI had based the MDR change on the interchange. He did mention that payment companies would face a couple of short-term challenges. “One of IT implementation on cap of MDR and second the ability of payment players including banks to quickly validate the merchant turnover while boarding merchants,” Neralla said. “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 and removes the suspense over the draft issued earlier,” he added in a statement.

Note that in August, the National Payments Corporation of India (NPCI) merged QR codes generated by the UPI will be merged with the ones generated by BharatQR. NPCI instructed member banks to ensure that their applications be equipped to read both UPI QR as well as BharatQR by 15th September 2017. Essentially, it instructed banks and payment players to embed UPI credentials on BharatQR and vice versa.

The UPI and BharatQR have different merchant discount rates (MDR) so it will be a challenge for card networks and the NPCI to sort out where the transaction is originating and charge merchants accordingly. On the UPI, merchants are charged a merchant discount rate (MDR) of 0.25% for payments below Rs 1,000 and 0.65% for all other charges.

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Kumar Rajagopalan, CEO of Retailers Association of India (RAI)

Rajagopalan said that the new MDR changes would be detrimental to large merchants and felt that the MDR should not exceed Rs 40 per transaction. 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. With the MDR being revised upwards to 0.9% of a transaction, Rajagopalan said it will have an adverse impact on supermarkets and hypermarkets.

“In a retail business, especially a supermarket or hypermarket where the margins are just 2% – 3%, such an increase in MDR will have a huge impact on costs, making it imperative for retailers to pass it on to the consumer,” he said.

“Since a debit card transaction is nothing but direct debit from the bank account of the consumer, there is no credit risk for the issuing bank. Therefore, there is no justification for this type of huge increase in MDR. In addition, the RBI has set the maximum limit for MDR at Rs 1000, which is unrealistic as it means that the transaction size is nearly Rs 1.1 lakh,” he added. “Considering that the MDR in countries like China is still at only 0.2%, the move favours banks and card companies such as visa and master and is detrimental to the interest of digital economy, merchants as well as consumers, who often end up bearing the burden of such increases.”

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MB Mahesh, financial analyst at Kotak Institutional Equities

In a research note, Mahesh said that the reduction of MDR for QR-code based transactions will likely bode well for broad-based and asset-light adoption of cashless modes of transactions in the medium-term.

“However, the volume is unlikely to make up for the shortfall in the reduction of fees in the short term and hence, the near-term impact would be marginally negative for a few players like Axis Bank, HDFC Bank, ICICI Bank and State Bank of India,” he said. Debit card fee is a small but a key area of growth for most of these banks, he added.

“Our calculations suggest that the total MDR is approximately Rs 3000 crore for FY2017. Sources of revenues in a debit card business is the issuing, payee bank and interchange fees. While the lack of disclosures makes it a challenge to arrive at the impact of lower MDR for acquiring banks. The largest issuing banks are also the largest infrastructure providers (POS machines): SBI (22% market share), Axis Bank (16%), HDFC Bank (14%) and ICICI Bank (11%),” the note added.

Also read: Why it is difficult to scale POS machines in India