Rationalise merchant discount rates to push cashless payments
A panel of CMs headed by Andhra Pradesh chief minister N. Chandrababu Naidu has urged the Reserve Bank of India (RBI) to slash the merchant discount rate (MDR) or the cost a merchant pays a bank for providing debit and credit card services.editorials Updated: Dec 21, 2016 17:07 IST
‘Life in plastic, it’s fantastic.’ No, a panel of chief ministers wasn’t exactly invoking the 90s song by Aqua in times of demonetisation, but their proposal is meant to discourage cash and boost credit card acceptance in the country. A panel of CMs headed by Andhra Pradesh chief minister N. Chandrababu Naidu has urged the Reserve Bank of India (RBI) to slash the merchant discount rate (MDR) or the cost a merchant pays a bank for providing debit and credit card services.
The panel has suggested a MDR of 0.50% with a floor and cap for transactions by debit cards. At present, the MDR is 1% for transactions over Rs 2,000. The recommendations are in line with a paper prepared by former Unique Identity Authority of India chief Nandan Nilekani to realign the transaction fee structure. The number of credit and debit cards in India is rising but as a people, we tend to prefer debit cards over credit cards In March 2016, a total of 24.51 million credit cards and 661.8 million debit cards were in operation, according to the RBI. The Indian payment cards market is expected to grow at of 10% over the period 2015-2020.
Keeping a check on the merchant discount rate is crucial in a country like India where on the one hand, the government is pushing for an evolution to online transactions and on the other, online marketplaces make susceptible buyers pay a contentious ‘convenience charge’ for payments made through plastic. If more people stop paying for their transactions through cash, the beneficiaries will include both the government that is under fire for lack of currency and the merchant whose cash-handling costs come down. One view is that the State shouldn’t intervene in plastic transactions and let market forces decide the MDR. But the RBI has been batting for its rationalisation. In a in a concept paper on card acceptance infrastructure earlier this year, the central bank said that the high MDR, often transferred by the merchant to the consumer, inhibits many Indians from using plastic money.