The new merchant discount rate structure will push debit card use

How it impacts returns of banks with significant PoS terminals needs to be seen

In a bid to provide a fillip to digital payments, the RBI’s decision to restructure the merchant discount rate (MDR) for debit card transactions on the basis of merchant turnover, rather than the present slab rate based on transaction value, is likely to see better debit card acceptance by small merchants. Capping the MDR at a flat 0.4 per cent of transaction value, for merchants with a turnover of up to ₹20 lakh during the previous financial year, irrespective of the value of purchase, is a key positive that will drive higher card usage among smaller merchants.

Before demonetisation, MDR for debit card transactions was capped at 0.75 per cent of the transaction amount for value up to ₹2,000 and at 1 per cent for transactions above ₹2,000. To facilitate better acceptance of card payments, the RBI had lowered the fee, capping the MDR at 0.25 per cent for transactions up to ₹1,000 and at 0.5 per cent for transactions above ₹1,000 and up to ₹2000. These special measures were extended by the RBI and are still in force.

While it is still early days to gauge the impact of the new MDR structure on banks putting up point-of-sale (POS) infrastructure, some feel that the deal could work out in their favour as well. The earlier slab structure that earned them lower MDR fee for low-ticket purchases could well fetch them higher returns in case of larger merchants in urban centres. The MDR is capped at a flat 0.9 per cent of transaction value for merchants with turnover of above ₹20 lakh. MDR is the amount that merchants pay to banks issuing the card readers or POS devices. The money is then split with the entity or bank issuing the cards.

Change in structure

The rationalisation of MDR is based on the categorisation of merchants on the basis of turnover, adoption of a differentiated MDR for QR code-based transactions, and specifying a ceiling on the maximum permissible MDR. Cap on MDR for transactions at QR code-based card acceptance infrastructure is set lower at 0.3 per cent and 0.8 per cent for merchants with turnover up to ₹20 lakh and above ₹20 lakh, respectively. The overall limit on MDR will be ₹200 and ₹1,000 per transaction for the respective merchant category. According to the data put out by the RBI, there were 2.9 million PoS terminals as of September 2017, of which five banks — SBI, Axis Bank, HDFC Bank, ICICI Bank and RBL Bank — accounted for 72 per cent. The high concentration has been a cause for concern. It needs to be seen if the new MDR structure incentivises or discourages banks from putting up more POS terminals.

High concentration of PoS

As of September 2017, SBI had the largest PoS network with 6.41 lakh terminals, followed by Axis Bank with 4.65 lakh PoS terminals. HDFC Bank (4.07 lakh), ICICI Bank (3.26 lakh), RBL Bank (2.5 lakh), Corporation Bank (1.5 lakh) and Bank of Baroda (1.04 lakh) are other banks with significant number of PoS terminals. As of September 2017, there were about 819 million debit cards with just 2.9 million PoS terminals.

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