New Delhi: The government on Wednesday asked banks to waive the merchant discount rate (MDR) or transaction fee charged on debit card payments until 31 December to encourage more customers to use digital transactions.
All public sector banks and some private lenders have agreed to waive these charges, economic affairs secretary Shaktikanta Das told reporters in New Delhi.
Merchant discount rate is the commission paid by the merchant to the acquiring bank for every transaction conducted on the Point of Sale machine installed by the bank. Since 2012, the Reserve Bank of India has capped the MDR for debit card transactions up to Rs2,000 at 0.75% and at 1% for all transactions above Rs2,000.
Typically, a sizeable portion of the MDR earned by the acquiring bank goes into paying interchange fees for the card issuing bank and a part of it goes to payment service providers such as Visa, MasterCard or National Payments Corp. of India (NPCI).
Following Wednesday’s announcement, private sector lenders ICICI Bank and Axis Bank waived MDR on all debit card transactions. This comes after the country’s largest lender, State bank of India (SBI), waived MDR on all RuPay debit cards last week.
Payment service providers such as NPCI and Visa have also relaxed the switching fee for all debit card transactions. While NPCI has waived charges till 31 December, Visa has announced a rebate to the acquiring and issuing banks. For NPCI, this means forgoing the fees which stood at 60 paise for the card issuing bank and 30 paise for the acquiring bank on all PoS and e-commerce transactions.
The waiver of MDR, along with the government’s earlier move to waive ATM transaction charges, is likely to hit banks’ fee income in the third quarter. According to analysts, large private sector lenders, which are the dominant players in the PoS business, are likely to be hit the most.
Since the government announced demonetisation, many banks have seen a jump in PoS transactions and the income earned from these transactions. For instance, State Bank of India, which has the largest market share in terms of the number of PoS terminals at 21.53%, has seen the value of daily debit card spends jump from ₹ 150 crore to ₹ 400 crore, said a senior SBI official, who declined to be named?.
However, bankers are not sure whether the government’s move to drop MDR will indeed push merchants to use electronic payments. Waiving MDR will only hit the viability of PoS business as the cost involved is very high. Merchants find it easier to transact in cash and are unlikely to move to electronic payments, according to some senior bank officials with large banks. In fact, growth in PoS machines has seen a decline after RBI first reduced the MDR in 2012, the bankers said.
Latest data from RBI shows there are 15 lakh PoS terminals and 86 crore debit cards in the country. A concept paper by the central bank in March this year highlighted that debit cards registered a growth of 64% between October 2013 and October 2015, while PoS machines increased by just 28% during the same period. The paper also noted that while almost every bank is a card issuer, very few are engaged in merchant acquiring and setting up of card acceptance infrastructure.
While banks have to bear the loss till 31 December to support the government in its digital push, industry experts believe that going forward, MDR will have to be unregulated if the government is serious about encouraging electronic payments.
“It is just a temporary phase and will further facilitate to restore normalcy on-ground. Once it is ‘business as usual’ the MDR rates would be reckoned back basis the market mechanism in play," said Naveen Surya, managing director of Itz Cash and chairman of Payments Council of India.
“Waiving off the MDR on debit card usage is a substantial move in the current scenario as it will encourage both customers and merchants to experience the transactional ease of digital payments which will immensely pay off in the long term," said Surya, also a member of the finance ministry committee on digital payments.
The committee, which is headed by Ratan P. Watal, former finance secretary, is currently in the final stages of releasing a framework for digital payments systems in the country.