Browbeating banks into a loss-making exercise could ruin matters. Banks are not in favour of a ceiling on the MDR since the costs are fairly high; the machine cost anywhere between Rs 8,000 and Rs 13,000 while the SIM card, maintenance and paper rolls all add to the expenses.
Ahead of RBI’s final guidelines on merchant discount rates (MDR)—the rate that merchants pay credit card companies—the government has indicated to the central bank that it would like to see MDR for debit cards capped at Rs 200 per transaction. With debit card transactions slowing—in July this year, these added to Rs 34,600 crore as compared to Rs 58,000 crore in December 2016—the government would like to encourage digital transactions, and lowering MDR is seen as one way of encouraging merchants to accept debit cards. The idea of a cap on MDR, however, vitiates market principles. The government must try and see that less cash is used, but this cannot be at the cost of the banks or the merchants. If it believes some financial support is necessary to promote digital transactions, it must be prepared to fund the effort—after all, the government will benefit from higher taxes from the economy using less cash. Asking banks to pick up the tab will simply discourage them from putting out more Point of Sale (PoS) machines. Keep in mind, users are moving to more digital transactions anyway since they are more convenient—larger volumes will, over time, drive down costs anyway. Keep in mind, though the value of transactions is smaller compared with the December peaks, it is nevertheless twice what it was in July 2016.
Browbeating banks into a loss-making exercise could ruin matters. Banks are not in favour of a ceiling on the MDR since the costs are fairly high; the machine cost anywhere between Rs 8,000 and Rs 13,000 while the SIM card, maintenance and paper rolls all add to the expenses. Banks argue that around 80% of the transactions are below Rs 1,000 today and, consequently, the 0.25% fee that is allowed on them is simply not remunerative. Until the structure of the market changes from the high-volume-small-margin one it is now, they are not sure they can recoup the losses incurred on smaller transactions. In which case, the only chance of recouping costs is from larger transactions where the MDR is 1% right now. Indeed, RBI’s draft guidelines in February which suggested an MDR framework based on the turnover of merchants rather than merely a transaction-based fee were also flawed as they did not take into account the costs incurred by merchants. In the RBI scheme, vendors with a turnover of less than Rs 20 lakh—in line with the GST threshold—and those selling non-discretionary items were to pay not more than 0.4%. RBI had also recommended a different fee structure for smaller government transactions; for bigger government transactions of over Rs 2,000, it had set a 0.5% fee with a cap of Rs 250. In every category, merchants using digital infrastructure—a QR code—were to be charged a slightly lower rate compared to those operating with physical PoS infrastructure. While, on the face of it, a cap of Rs 200 might appear to place all merchants on an equal footing, in reality, it amounts to going easy on the larger ones. If the idea is to help smaller vendors, much like the less privileged are entitled to an LPG subsidy, the bigger shopkeepers should be paying more. But the best way forward would be to let the market dynamics determine the charges—over time, if UPI-based transactions rise, PoS costs will in any case come down to become competitive.