Digital payments: NPCI cuts ceiling on merchant fees to banks

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Published: September 14, 2019 7:19 AM

The merchant discount rate (MDR) for QR-based card transactions has also been fixed at no more than 0.5%, going up to Rs 150 per transaction.

Digital payments, NCPI, merchants' fees, card transactions, debit card transactionThe new rates will become effective on October 20.

The National Payments Corporation of India (NPCI) has lowered the ceiling on fees that merchants must pay banks for accepting digital payments involving amounts higher than Rs 2,000. Merchants will now have to shell out up to 0.6% for each debit card transaction with the maximum fee being capped at Rs 150. At present, this is capped at 0.90% for transactions above Rs 2,000, with a ceiling of Rs 1,000 per transaction. The merchant discount rate (MDR) for QR-based card transactions has also been fixed at no more than 0.5%, going up to Rs 150 per transaction.

The objective is to boost the government’s cashless agenda. A recent study showed that banks are faithfully executing the government’s cashless agenda but there’s little buy-in from merchants. Fewer than half the vendors acquired by banks have gone cashless.

The new rates may not help too much. Reluctant to leave a trail for the taxman, merchants, especially smaller shops, are not easily persuaded to transact digitally. Also, given that a large number of consumers are still more comfortable paying by cash, merchants, most of them offline brick-and-mortar stores, have little motive to use digital options regularly to accept consumer payments.

The new rates will become effective on October 20. The government’s scheme waiving MDR for all merchant digital transactions of up to Rs 2,000 and reimbursing banks for the same ends in January 2020.

Banks don’t make money in the acceptance business and taking away the sliver of cover they earn from MDR could hamper investments in merchant acquisition. Parag Rao, country head (card payment products, merchant acquiring services), HDFC Bank, had recently told FE that the merchant economy is in a place where some say MDR charges are too high. “We have mixed views on that. We do understand that for small merchants it could be an entry barrier. But in my opinion, large merchants should be able to bear a 1% or 1.5% charge,” Rao had said.

In a statement, NPCI said that the reduction in MDR is aimed at creating a cost-effective value proposition for all stakeholders in the payments ecosystem, thereby increasing merchant acceptance footprint across the country. It will support merchants to accept high-value digital payments from 830 million debit cards. Dilip Asbe, MD and CEO, NPCI, said, “With the reduction and capping of MDR, merchants will now be encouraged to accept debit cards, which up till now they were averse due to higher MDR structure.”

Last month, NPCI had also announced a reduction in MDR for transactions made through the Unified Payments Interface (UPI) channel. MDR is a fee paid by merchants to banks for offering them infrastructure to accept digital payments. The amount is then split between the bank that offered the acceptance device (acquirer), the bank whose customer made the payment (issuer) and fintechs or card networks who facilitated the transaction. The Union Budget for 2019-20 proposed to do away with MDR altogether in a bid to push the usage of digital means to accept payments. However, both banks and fintechs engaged in the payments business have been unhappy with the proposal.

FE had earlier reported that while fintechs demand a rollback of the proposal, banks are planning to ask for a detailed framework to implement the same. A flat rate for merchants of all sizes, reimbursement for merchant discount rate (MDR) revenue forgone and a tax rebate for cashless transactions may be recommended as features for such a framework.

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