A tightrope walk

The merchant discount rate needs to be carefully balanced

The rift between the Reserve Bank of India and a host of merchants and retailers over the new way of calculating the merchant discount rate (MDR) is widening, with both sides refusing to budge from their respective positions. The MDR is the charge that a merchant has to pay to the bank concerned every time a consumer uses his debit card on the point-of-sales (PoS) machine. Trouble arose last week when the RBI announced a rationalisation of the MDR that is set to come into effect from January 1, 2018, and which, in effect, raised the MDR. On Wednesday, however, the RBI snubbed the protesting retailers by saying that they “did not provide any feedback” when the draft guidelines were released earlier. The central bank also reiterated its firm intention to not alter the new MDR regime. 

The unhappy merchants do have a valid point. As of now, merchants are charged based on a consumer’s transaction amount. According to the RBI’s new scheme, the MDR will be levied on the basis of the turnover of the merchants, the key point of distinction being an annual turnover of Rs 20 lakh. For small traders, the MDR will not exceed 0.4 per cent of the transaction value and for other merchants, the MDR will not exceed 0.9 per cent. Crucially, the RBI has also capped the MDR in both these categories to Rs 200 and Rs 1,000 per transaction, respectively. The end result is that in some cases, even small-value transactions will turn out to be costly. This is precisely what the RBI should be trying to avoid because, as the retailers correctly argue, this change will provide a disincentive for them to transact digitally and hamper the increasing use of debit cards, especially in the rural segment, which witnessed a sharp jump after demonetisation. Retailers have also said that they will pass on the extra cost to customers, even though the MDR is not supposed to be paid by consumers.

There are some other points of contention as well. For instance, there is opposition from some large retailers that allow customers to load pre-paid payment instruments such as e-wallets by using a debit card. In such cases, the PPI issuer is likely to be treated as a merchant and charged accordingly. Another concern is the distribution of the MDR among the issuers, the acquirers, and the card networks. Reportedly, 90 per cent of the MDR margin is cornered by the bank issuing the debit card.

Yet, it would be a mistake to dismiss the RBI’s stand. For one, the retailers are comparing the new MDR regime to a structure that was put in place as an interim measure after demonetisation. When compared to the rates before demonetisation, the RBI stands vindicated. Moreover, enabling digital transactions does involve costs — such as PoS machines, debit cards, and the transaction technology. A lower MDR would reduce the economic incentive for banks to provide such services. In fact, the RBI has argued that even this marginal increase in the MDR is not adequate to cover all the costs. Clearly, a lower MDR can only work when there is a big enough scale of such digital transactions. Till such a point is reached, the RBI and all other stakeholders will have to walk a tightrope. A finance ministry official said on Thursday that the ministry would “talk” to the RBI to find a solution to the issue. Though there are no easy answers, it will be better if the government stays away and allows the RBI to take a final decision after consulting all the stakeholders.