Mumbai: The Reserve Bank of India (RBI) on Thursday capped the rate banks can charge merchants for transactions using debit cards at 1% of the value of the purchase to encourage their use over credit cards.
The merchant discount rate (MDR) has been limited to 0.75% for transactions up to Rs2,000 and at 1% above that, with effect from 1 July, RBI said. MDR is currently 1-2.5%, regardless of whether a credit or debit card is used.
Since credit card transactions carry a higher risk, “it is necessary to encourage the use of debit cards”, RBI said. According to RBI, “the debit card is a secured product with the card usage being linked to the availability of funds in the accounts of the customers. Credit cards, on the other hand, are a part of the unsecured credit product portfolio of the issuers”. Given the different nature of the two, a similar MDR can’t be charged, it said.
Charging a different rate “would encourage all categories and types of merchants to deploy the card acceptance infrastructure and also facilitate acceptance of small-value transactions”. Further, a lower MDR, with the “expected increase in transaction volume on account of network effects, would result in a reasonable RoI (return on investment) for acquiring banks”, RBI said.
Bankers said the move will encourage debit card-based transactions. “This makes sense for merchants as it will bring down their costs. Now merchants will encourage customers to use debit cards as there is an incentive,” said Pradeep Kumar, deputy managing director, IT, State Bank of India.