RBI proposes to link MDR charges with merchant revenue

RBI releases draft norms seeking to overhaul the rules governing how much banks can charge merchants for providing debit card services


In 2012, RBI capped the MDR for debit card transactions up to Rs2,000 at 0.75% and at 1% for all transactions above Rs2,000. Pradeep Gaur/Mint
In 2012, RBI capped the MDR for debit card transactions up to Rs2,000 at 0.75% and at 1% for all transactions above Rs2,000. Pradeep Gaur/Mint

The central bank released draft norms that seek to overhaul the rules governing how much banks can charge merchants for providing debit card services in order to make such transactions cheaper and more popular among smaller merchants.

The Reserve Bank of India has proposed to link the so-called merchant discount rate (MDR) to the annual revenue of the merchant, according to the draft norms released on Thursday. This marks a departure from the current flat MDR charged on all such transactions.

In 2012, RBI capped the MDR for debit card transactions of up to Rs2,000 at 0.75% and at 1% for all transactions above Rs2,000.

The draft norms propose to create four different classes of merchants—smaller merchants that have an annual turnover of up to Rs20 lakh; government transactions; special category merchants; and all other merchants who have an annual turnover of over Rs20 lakh.

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The special-category merchants include those who provide services related to utilities, hospitals, educational institutions excluding coaching classes, insurance, mutual funds, army canteens, state transport and state waterways, agriculture and allied activities.

According to the proposed regulations, smaller merchants and special category would be charged an MDR not exceeding 0.4% on physical transactions at point of sale (PoS) or other types of terminals and a rate not exceeding 0.3% for online transactions.

For all other merchants who have annual transactions over Rs20 lakh, the physical transactions would be charged at a rate not exceeding 0.95%, while online transactions would be charged an MDR not exceeding 0.85%.

For government transactions, the draft guidelines propose a flat fee on small-value transactions. For transactions up to Rs1,000, it proposes a flat fee of Rs5, while transactions between Rs1,001 and Rs2,000 will attract a Rs10 charge. For all government transactions worth Rs2,001 and above, RBI proposes a 0.5% MDR.

RBI has requested comments from stakeholders by 28 February.

“MDR for debit cards for petrol/fuel shall be decided subsequently after the industry consultation process with oil ministry is completed,” the regulator said in its draft guidelines.

“Card networks shall suitably revise the applicable interchange and network fees, preferably on percentage basis rather than any flat-fee basis. Banks shall also appropriately rationalise the monthly rentals, if any, recovered from the merchants taking into account the type of card acceptance infrastructure deployed at merchant location,” said RBI.

Fuel companies and banks came to a head in January after the RBI withdrew the MDR holiday on all card transactions.

After 8 November, following demonetization, in order to make things easier for customers and to promote non-cash transactions, the government waived MDR on all card purchases for 50 days. With that promotional period lapsing, banks said they would reinstate the charge. The banks had said that they would recover the charge from fuel pump owners from 9 January, prompting dealers to threaten not to use card-swiping machines issued by some banks. That stalemate called for government intervention, leading to a status quo where banks and fuel companies agreed to split the charges equally.

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