Slate . All you wanted to know about the zero MDR issue

With the Union Budget just around the corner, industry bodies have been knocking at the Centre’s doors with their expectations and pleas. While this pre-Budget lobbying is a norm, it has been more strident this year as businesses face the brunt of the economic slowdown. To get out of their straitened circumstances, many businesses aren’t seeking new sops, but want the Centre to do away with proposals announced in previous budgets. Payment banks’ pleas to the Centre to defer the zero MDR regime is one such instance.

Merchant discount rate (MDR) is the fee levied by banks from merchants for providing them with payment (settlement) infrastructure — or POS (point-of-sale) machines. Zero MDR refers to the proposal made by the Centre in its last budget to do away with all charges (including MDR) on digital payment transactions.

The Centre had mandated that large businesses — those with turnover greater than ₹50 crore — provide customers with low-cost digital modes of payment and had asked banks to levy zero charges on the same.

Recently, the Finance Minister gave this initiative a further push by announcing that after the notification from Department of Revenue, no MDR charges will be applicable on digital transactions via the Rupay and UPI platforms. But payments banks and other banks are up in arms against this, fearing loss of revenues on such a waiver.

Ever wondered why the whole nation is going gaga over digital payments, but the shopkeeper (merchant) around the corner simply refuses to accept anything but cash, especially for small-ticket payments? Given the ease in handling digital transactions, his reaction may have taken you by surprise. Well, other factors apart, the merchant’s aversion to digital or card-based payments could likely be a by-product of the MDR levy he’s required to shell out to banks.

The RBI, in order to protect consumers, has ensured that merchants don’t pass on MDR charges to their customers, but the charge continues to pinch merchants themselves.

To encourage digital transactions, the RBI has tried to streamline MDR levies several times in the past. Its most recent attempt was to set limits on MDR charges based on the turnover of the merchant, for QR code-based transactions and others. While this did boost the acceptance of digital payments in the country, many digitally-averse merchants still exist.

Paying through digital modes is hassle-free and can be rewarding too, thanks to the cashbacks and scratch cards payment companies offer. The more the merchants allowing digital payments, the more your chances of winning such rewards.

But there is a small hiccup; zero MDR charges can lead to losses for payment banks running into crores of rupees. So a complete withdrawal of these charges, or even a drastic fall in them can prompt banks to prune or do away with the cashbacks and rewards that you’re currently enjoying.

The Centre, too, appears to be quite stuck on its decision of not awarding any compensation to these banks, as it expects them to recoup losses through higher transaction volumes and increased savings deposits, as more people go digital. For banks, this is easier said than done.

It is always good to work towards size zero gradually, rather than go on a crash diet.

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