RBI releases discussion paper on charges on transactions via debit, credit cards, others

The Reserve Bank of India (RBI) on Wednesday released a discussion paper on payment systems for public opinion. The feedback can be provided on the questions raised in the paper by October 3, 2022. Charges on transactions through debit cards, credit cards, IMPS, NEFT, RTGS, PPIs, and UPI among others will be taken into consideration. RBI's initiatives in the payment systems have been to ease frictions that may arise from systemic, procedural, or revenue-related issues.

In its statement, RBI said, the discussion paper covers all aspects relating to charges in payment systems [such as Immediate Payment Service (IMPS), National Electronic Funds Transfer (NEFT) system, Real Time Gross Settlement (RTGS) system, and Unified Payments Interface (UPI)] and various payment instruments [such as debit cards, credit cards and Prepaid Payment Instruments (PPIs)], etc. The feedback received would be used to guide policies and intervention strategies.

Talking about overall payment systems in India, RBI said, while there are many intermediaries in the payments transaction chain, consumer complaints are generally about high and non-transparent charges.

RBI added, "Charges for payment services should be reasonable and competitively determined for users while also providing an optimal revenue stream for the intermediaries. To ensure this balance, it was considered useful to carry out a comprehensive review of the various charges levied in the payment systems by highlighting different dimensions and seeking stakeholder feedback."

Here's what RBI seeks in regards to debit and credit cards:

Debit cards:

Under the discussion paper, in regards to debit cards, RBI said, "the cost to small merchants for accepting debit card transactions has come down substantially. However, RBI continues to receive complaints from merchants on their cost of

accepting digital transactions. Many of these complaints arise due to the role played by intermediaries in the acquiring process."

Thereby, RBI seeks feedback on whether debit card transactions should be charged as normal funds transfer transactions. Or, whether MDR for debit cards should be uniform across merchants (irrespective of turnover). Also, RBI seeks opinion on whether it should regulate interchange for debit card transactions --- while deregulating MDR and letting stakeholders decide on the optimum level of MDR and interchange. Additionally, views are sought on whether MDR for debit cards should be a percentage of the transaction or if there is a need for a fixed amount irrespective of the transaction value.

Notably, a debit card is the only merchant payment instrument where RBI has intervened to bring down the cost to merchants.

Further, RBI seeks feedback on whether RuPay cards to be treated differently from other debit cards.

On debit cards, RBI said, "administered reduction of MDR can harm the ecosystem and impact the profitability of entities providing these services. This would also affect investments in infrastructure and innovation in the payments acceptance area. It is, therefore, presented that rather than further mandating

reduction of MDR, it may be necessary to review the scheme followed by PSOs regarding distribution of the charges among the PSPs."

Credit cards:

Coming to credit cards, RBI has not issued any regulatory mandate or intervened on MDR for credit card transactions. The main reason for this is the credit-linked nature of the product.

Explaining further, RBI said, while the interest-free funds are availed by the cardholder, the cost of such funds is recovered from the merchant in the form of higher MDR. Considering the nature of MDR for credit cards, the charges on merchants in a credit card transaction should ideally reflect the movement in interest rates in the market for similar tenors.

"A transparent mechanism for capturing this has not been put in place by the PSOs / participants. While many a time the increase in interest rates gets reflected in the form of a higher MDR, benefits of a decrease in interest rates do not seem to be passed on to the merchants in the form of lower MDR," RBI added.

Following the above, RBI seeks feedback on whether credit card MDR charges reasonable is reasonable, or whether is there a need for the central bank to regulate MDR. Also, RBI is seeking an option of regulating interchange for credit card transactions instead of MDR or both.

India is heavily a debit card market as seen from the number of such cards issued.

By end of May 2022, a total of 92 crore debit cards have been issued, while there were only 7.5 crore credit cards issued.