New merchant discount rate favours small businesses: RBI

The Reserve Bank of India on Wednesday said the new merchant discount rate for debit card transactions at point-of-sale terminals as well as online transactions, which is effective from January 1, 2018, is pro-small merchants and the rate has been fixed after elaborate consultation with all stakeholders.

MDR is the fees paid by the merchant to an acquiring bank, which sets up the point-of-sale (POS) infrastructure, for its services. A portion of this fee is passed on by the acquiring bank to the card-issuing bank in the form of interchange fee.

“After an elaborate consultative process, the MDR charge has been fixed to achieve the twin objective of giving further fillip to debit card transactions, especially at smaller merchant establishments, while making it worthwhile for the banks to recover a part of their cost so as to invest in technology, fraud prevention, and security of the transactions,” said BP Kanungo, Deputy Governor, RBI.

He underscored that the MDR has been fixed after elaborate consultations with stakeholders, visits to branches, and seeing their books to achieve the twin objectives that debit card transactions should increase while it should be viable for the banks.

“The MDR rate is the maximum rate and the actual rate is much below that.

So, we want e-payment transactions at merchant establishments, especially small merchants, to grow,” said the Deputy Governor.

At the same time, it is essential to ensure that banks do not make huge losses, said Kanungo, adding that they will still be making losses (after the rejig in MDR). The losses will be reduced due to the rejig in MDR rates.

“There are five major banks which control 70-80 per cent of the card-acquiring business. The five major banks are — ICICI Bank, HDFC Bank, Axis Bank, State Bank of India, and Bank of Baroda,” he said.

On the issue of interchange fee (fee passed on by the merchant-acquiring bank to the card-issuing bank), he said there are two theories floating — first, that RBI should not control the rates and that it should control the interchange; second, that the RBI should intervene in the revenue sharing of all the stakeholders involved in this case.

Several countries control MDR and some don’t and some control the interchange.

“But so far we have been controlling the MDR. But if it is required, we will look into the control of interchange. It is a big component at the moment,” explained Kanungo.

The Deputy Governor underscored that the MDR is not to be borne by the customer.

It is paid by the merchant. MDR is the maximum rate and there are several instances, depending on the business relationship and the volume that they generate, many merchants bargain for and get a lesser discount rate from the banks.

“I am meeting you to assuage the feeling that it (MDR) is not actually anti-small merchant, it is rather pro-small merchant. And you see, worldover, why the merchant pays the MDR?

“The reason is, you and I while walking down the street will see something in the shop but we are not carrying enough cash, we simply swipe our card and make the purchase.

“So, had it not been for the ease of using a debit card or credit card, I would not have made that purchase.

“So, the volume of transactions and sales are going up on behalf of the merchants, simply because of the ease that the card offers.

“Number 2, the risk associated with carrying cash is not there. Banks have started charging for deposit of cash also. So, the merchant does not incur that cost,” explained Kanungo.

On the issue of subsidising MDR, the top RBI official said: “It is the government’s domain. They will have to take a call. It will be a sovereign decision. I am no one to either support it or oppose it. If the government wants to subsidise, fine.”

On the possibility of subsidising MDR from Nabard’s financial-inclusion fund, no decision has been taken so far. There is a committee that decides on this.