MUMBAI: On December 6, the Reserve Bank of India rationalised the merchant discount rates (MDR), which retailers said would impact costs and increase burden consumers. But, a closer look reveals that the cap appears to be beneficial to merchants who can gain from a uniform rate structure as opposed to dealing with multiple slabs.
MDR is a fee merchants pay to acquiring banks for services and not levied on customers. Analysts hailed the MDR restructure on the basis of merchant turnover rather than the prevailing slab-rate based on transaction value, as historically any MDR intervention/rationalisation effectively benefited large merchants, for who, the weighted average MDR stands at 0.75-0.85 per cent — slightly lower than the cap prescribed now.
Rationalisation of MDR is expected to benefit merchants, acquiring banks and issuing banks. For instance, merchants get a single rate irrespective of transaction slabs allowing them to negotiate finer rates from acquiring banks (based on relationship and volume of debit card payments). For acquiring banks, it helps to cross-subsidise small merchants, while still being able to recover a portion of their costs through large merchants.
Also, the cap on MDR gives the acquiring bank flexibility to offer finer rates to large merchants. Lastly, the wider adoption of debit card payments helps issuing banks to recover costs incurred in ensuring safety and security of transactions, authentication and authorisation process, fraud and risk monitoring process, besides bearing any loss towards fraudulent card usage. It also helps them incentivise customers for higher debit card usage for purchases.
“While RBI has mentioned in its circular that the rates have been ‘rationalised’ to increase the acceptance of debt cards by a wider set of merchants... the high cap defeats the purpose as it doubles up costs to merchants,” Kumar Rajagopalan, CEO, Retailers Association of India, had told Express. He added that the maximum limit for MDR set at Rs 1,000, was unrealistic as it means that the transaction size was nearly Rs 1.1 lakh.
Rationale behind cap
Last year, MDR was reduced to zero, as an interim measure during mid-Nov 2016 to Dec 31, 2016. The cap on MDR comes nearly a year later, which the central bank said was to encourage the use of debit cards.