Reserve Bank links MDR charges to merchant revenue

MUMBAI: The Reserve Bank of India revised merchant discount rate (MDR) charges, or the commission paid by a merchant to a bank for facilitating digital transactions, to encourage small businesses to start accepting card payments. The regulator’s decision to link MDR with the merchant’s revenue means that the average transaction charges are set to increase for most businesses that already accept such payments, although maximum rates have been capped.

For small merchants, defined as those with a revenue of less than ₹20 lakh, MDR would be 0.4% of transaction value or ₹200, whichever is lower. For other merchants, MDR is 0.9% of transaction value or ₹1,000, whichever is lower. These charges are effective from January 1, 2018, RBI said in the circular released on Wednesday.

Under current rules, set by RBI post the November 8, 2016 invalidation of high-value currency notes, MDR is charged based on three slabs.

For transactions below ₹1,000, it is 0.25%; for those between ₹1,000-2,000, it is 0.5%. Merchants have to pay a commission of 1% if the transaction value is more than ₹2,000.

Promoting a cashless economy is one of the stated ambitions of the government and one of the reasons offered for the note ban. Debit card usage volume almost tripled to 2.4 billion transactions in 2016-17 from around 800 million in 2014-15. Simultaneously, the value of these transactions grew to ₹3.3 lakh crore from ₹1.2 lakh crore. That means an average transaction value of ₹1,375, at which the proposed MDR is higher than the current one.

“This regulatory framework will be good news for banks, not so much for merchants considering that the average MDR would be higher than the current one. RBI should have regularised the prevalent MDR structure which was brought down during the demonetisation period,” said AP Hota, former chairman, National Payment Corp of India.

RBI has also introduced different rates for digital transactions processed via QR codes. Rates for these are 10 basis points lower for both merchant categories.

The proposed structure is simpler than what RBI had suggested in a draft paper in February.

The draft norms proposed to create four different classes of merchants—smaller merchants that have an annual turnover of up to ₹20 lakh; government transactions; special category merchants such as those providing services related to hospitals, utilities and educational institutions; and all other merchants who have an annual turnover of over ₹20 lakh.