Monday 11 December 2017

RBI lowers card transaction rate for small businesses.

Debit card transaction rate

Digital payments are expected to reach new horizons with good news from India’s Reserve Bank of India. RBI has decided to low Merchant Discount Rate for small and medium businesses in India. Politicians and RBI shifted its goal posts to increase digital payments after the historic decision of demonetisation. It is an imminent fact that large cash transactions in an economy lead to tax evasions. The government is now even considering bringing criminality provision in law for unaccounted large cash transactions.

As a short-term view, Reserve Bank of India has slashed MDR for small businesses to 0.4%. MDR is an acronym for merchant discount rate. It is the commission the bank and the card issuer share among themselves. Thus, if the MDR is 0.5 percent, this amount will be shared between the bank and the card issuer namely VISA, Mastercard, RuPay, AMEX etc.

In recent times, debit card transactions at ‘Point of Sales’ have shown significant growth. With a view to giving further fillip to acceptance of debit card payments for the purchase of goods and services across a wider network of merchants, it has been decided to rationalise the framework for Merchant Discount Rate (MDR) applicable on debit card transactions based on the category of merchants. A differentiated MDR for asset-light acceptance infrastructure and a cap on the absolute amount of MDR per transaction will also be prescribed. The revised MDR aims at achieving the twin objectives of increased usage of debit cards and ensuring sustainability of the business for the entities involved.

Payment products developed by National Payments Corporation of India will have differentiated MDR rates. The UPI and BharatQR have different merchant discount rates (MDR) so it will be a challenge for card networks and the NPCI to sort out where the transaction is originating and charge merchants accordingly. On the UPI, merchants are charged a merchant discount rate (MDR) of 0.25% for payments below Rs 1,000 and 0.65% for all other charges.

According to a press release issued by Reserve Bank of India, revised MDR rate from 1st January 2018 will be as follows:
  • Small merchants (with a turnover up to Rs 20 lakh during the previous financial year) will have to pay a maximum of 0.4% of a transaction on a physical POS or online. This will be capped at Rs 200 per transaction.
  • Small merchants who use QR code-based card acceptance infrastructure such as BharatQR will have to pay 0.3% of a transaction. This will be capped at Rs 200 per transaction.
  • Other merchants (with a turnover of over Rs 20 lakh during the financial year) will have to pay a maximum of 0.9%. This will have an MDR cap of Rs 1000 per transaction.
  • Other merchants who use QR code-based card acceptance infrastructure such as BharatQR will have to pay 0.8% of a transaction. This will be capped at Rs 1000 per transaction.

Digital payments for small businesses will be cheaper at large after the revision in MDR rates. Although, retailers which fall under GST turnover (above Rs. 20,00,000) are unhappy with the move. Government organisations (IRCTC, MCGM, Govt colleges) charge 1% from consumers on debit cards payments. But, private retailers do not charge consumers for Debit card payments. is of an opinion that we should aim for blanket rates for all merchants from 2019. High rates on POS based payments through cards are justified due to POS machine cost. Payments from BHIM, UPI or BharatQR should be made free for the benefit of retailers and consumers. India would move towards less cash economy if income tax limit is increased to Rs. 5,00,000.

- Chaitanya Kulkarni

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