RBI has done well to reduce merchant discount rates (MDR) on debit cards—for transactions below R1000, the rate will be 0.25% while for those between R1,000 and R2,000, this will be 0.5%.The new rates, which are valid till March 2017, should not upset banks given that before this, the government had requested them to waive the charges altogether. In any case, revenues from this channel are not very large. A back of the envelope calculation shows the revenue forgone on MDR charges—which were earlier 0.75% for transactions below R2,000—would not be much.
Assuming half the R1.6 lakh crore transactions reported on PoS (point of sales) in FY16 were below R2,000 and attracted an MDR of 0.25- 0.5%, this would have lost them R300 crore in annual revenues. Given the reduced rates are valid for just four months till March, even with a higher number of transactions, banks may not end up losing more than R200 crore. Indeed, they would surely be gainers in the long-term, as increased use of cards would mean less spending on ATM infrastructure. However, while lower MDR charges will encourage merchants to switch to digital payments in the near-term, over the long run, banks might be unwilling to roll out PoS devices if they don’t see any major earnings from this channel. The government has already said it is willing to pick up the tab for any loss on MDR for payments up to R1 lakh made to its departments via debit cards. It would do well to compensate the banks for any future loss in revenue for non-government payments as well, once the charges are reversed. The government must recognise that while MDR charges were one reason for low card usage, the cost of rolling out PoS machines too is not insignificant.
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Even though the government has said it will provide two PoS machines each for villages with population of over one lakh, it would still need to do much more to increase card usage. RBI deputy governor R Gandhi had recently highlighted that India needs over 2 crore PoS devices to reach the average levels of BRIC countries, but has only been able to dispense 15 lakh. The shift to less-cash cannot come at the expense of not spending any.