RBI monetary policy: MDR charges linked to merchant revenue
RBI’s decision to link MDR with merchant revenue means that average charges are set to rise for most businesses that already accept such payments
Mumbai: The Reserve Bank of India (RBI) on Wednesday revised merchant discount rate (MDR) charges, or the commission paid by a merchant to a bank for facilitating digital transactions, to encourage small businesses to start accepting card payments.
The decision to link MDR with the merchant’s revenue means that average charges are set to rise for most businesses that already accept such payments, although maximum rates have been capped.
For small merchants, defined as those with revenue of less than Rs20 lakh, MDR would be 0.4% of transaction value or Rs200, whichever is lower. For other merchants, MDR is 0.9% of transaction value or Rs1,000, whichever is lower. These charges are effective from 1 January 2018, RBI said in a circular.
Under current rules, MDR has three slabs. For transactions below Rs1,000, it is 0.25%; between Rs1,000 and Rs2,000, it is 0.5%. Merchants have to pay a commission of 1% if the transaction value is Rs2,000 or more.
Promoting a cashless economy is a stated ambition of the government and one of the reasons offered for the note ban. Debit card usage volume tripled to 2.4 billion transactions in 2016-17 from around 800 million in 2014-15. The value of these transactions rose to Rs3.3 trillion from Rs1.2 trillion. That means an average transaction value of Rs1,375, at which the proposed MDR is higher than the current one.
“This regulatory framework will be good news for banks, not so much for merchants, considering that the average MDR would be higher than the current one. RBI should have regularized the prevalent MDR structure,” said A.P. Hota, former managing director and CEO, National Payments Corp. of India.
RBI has also introduced different rates for digital transactions processed through QR codes. Rates for these are 10 basis points lower for both merchant categories. One basis point is one-hundredth of a percentage point.
The proposed structure is simpler than what RBI had suggested in a draft paper in February.
The draft norms proposed to create four different classes of merchants—smaller merchants that have an annual turnover of up to Rs20 lakh; government transactions; special category merchants such as those providing services related to hospitals, utilities and educational institutions; and all other merchants who have an annual turnover of over Rs20 lakh.
Deepak Sharma, chief digital officer of Kotak Mahindra Bank, said the new rules take into account the interest of acquirers, issuers, merchants and consumers.
“It also supports digital payment ecosystem as QR code is a separate payment system. The focus of the new rules is to get smaller merchants to do online transactions and QR code payments,” said Sharma.