Payments Council asks RBI to reconsider proposed caps on MDR

Presently the Reserve Bank of India (RBI) has capped merchant discount rate at 0.75% for transactions worth up to Rs2,000


PCI has written to RBI seeking a relook at the proposed caps on merchant discount rate. Photo: Mint
PCI has written to RBI seeking a relook at the proposed caps on merchant discount rate. Photo: Mint

Mumbai: The Payment Council of India Ltd (PCI) has written to the Reserve Bank of India (RBI) seeking a relook at the proposed caps on merchant discount rate (MDR), representatives of the council said on Thursday.

“Our contention is that the RBI should let market forces decide what the sustainable rate is for MDR. If the RBI still chooses to intervene, then it should also clarify the share of the card issuer and merchant acquirer in the MDR,” said Deepak Bhutra, chief executive officer, India Transact Services Ltd.

Presently the RBI has capped MDR at 0.75% for transactions worth up to Rs2,000. In case of transactions above that limit, the MDR is set at 1%. Under a set of draft guidelines which the regulator came out with in February, the MDR is proposed to be split among three different merchant categories namely small merchants, special merchants and all other merchants.

In the proposed guidelines, the MDR is capped in a range of 0.3% to 0.95%, depending on the type of merchants or the mode with which the customer chooses to pay.

“Presently, the issuing banks take up between 60-90% of the MDR and acquirers such as us are not being able to make enough. If the cap on MDR is brought down further, it could make the whole merchant acquiring process unviable,” said M.N. Srinivasu, director, BillDesk.

PCI believes that if the split between the issuer and acquirer is more equitable at 50% each, the business would become sustainable, allowing the acquirers to reach out to newer merchants for spreading the payments infrastructure.

Another area which PCI is seeking clarity on is also the need for so many merchant segments. According to Bhutra, the process of finding out the actual size of a merchant on the basis of a self-declaration and to keep tracking their revenue is actually a cumbersome process.

Typically, a bank that is in the point of sale (PoS) terminal business will get a third party to acquire merchants for it, while focussing on the card issuing business. Whenever a customer swipes their card at a terminal, the merchant has to pay a charge for this transaction, which is split between the card issuing bank and the merchant acquirer. Both the issuer and the acquirer pay a fee to the payment gateways for facilitating the payment.

As large banks drive the whole payments ecosystem, non-bank merchant acquirers have very little negotiating powers in the game, which leads them to earn only a small portion of the MDR.

The government has been trying to push its agenda for higher digital payments in India which would not only increase transparency in the way money is used, but will also help in reducing the nation’s dependence on cash. As on 31 January, India had over 2 million PoS terminals.

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