New MDR could discourage small retailers from adopting digital payment platforms, say experts

Retailers are opposing the Reserve Bank of India’s (RBI) move to reduce the merchant discount rate (MDR) as it could make non-cash payments unattractive for smaller players.

Recently, the RBI decided to reduce the MDR from 1 per cent to 0.9 per cent, effective from January 1, in a bid to boost digital payments.

However, retailers (both big and small) feel that the MDR has actually been increased and it would indirectly increase the cost of operations for the merchants. MDR is the fee paid by the merchant to the acquiring bank (that provides the PoS devices), and a part of the fee goes to the issuing bank (that issues debit/credit cards) in the form of interchange fee.

Under current rules, MDR has three slabs — for transactions below ₹1,000, the MDR is 0.25 per cent; between ₹1,000 and ₹2,000, 0.5 per cent; and 1 per cent if the transaction value is ₹2,000 or more.

However, under the new rules, the transactions below ₹1,000 will have an MDR of 0.4 per cent, for transactions between ₹1,000 and ₹2,000, it has been increased to 0.9 per cent, while the rate for transactions above ₹2,000, it has been reduced from 1 per cent to 0.9 per cent.

Industry experts in the payment system and retailers are of the view that while this will benefit retailers with average billing size of more than ₹2,000 per transaction, the smaller players will be at loss as they will have to bear the entire cost of operations.

According to V Balasubramanian, President (Merchant and Terminal Business) at FSS, a payment technology leader, the MDR rates have been increased in the up to ₹2,000 transaction slab, where about 70 per cent of the transactions occur for any retailer.

“This will definitely discourage small retailers from using PoS machines or any digital means. It may eventually happen that the customer might end up paying the price as the retailers might raise prices to cover their cost,” Balasubramanian said.

To this, Kumar Rajagopalan, President of Retail Association of India (RAI), added that the retailers might not be keen on using the PoS device and cash transactions may rise in the coming months if the rates are not revised. He further said that the association has asked the regulator to cap the MDR at ₹40 per transaction.

“We will see what all we can do to protect retailers’ interest,” he said, adding that “retailers make only 2-3 per cent net profit on the total turnover and on that if the MDR is increased, it is a huge cost. If the cost of operating a debit card will be higher than the cost of cash, then retailers will be forced to take cash.” Rajagopalan said that the step taken by the government will be detrimental to its Digital India drive.

He also added that the government should encourage NPCI’s RuPay as the only payment processing mechanism or card payment scheme. “There are too many players like MasterCard and Visa in the system. These are the players who are benefiting out of the high MDRs,” he added.

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