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No MDR charges on debit card payments up to Rs 2,000 for 2 years starting Jan 1

In an effort to boost digital payments, the Union Cabinet has decided to waive the merchant discount rate (MDR) applicable on all debit cards, BHIM and UPI transactions up to Rs 2,000.

December 15, 2017 / 06:00 PM IST

From January 1 next year, you will not be charged fees on debit card transactions up to Rs 2,000 for at least two years.

In an effort to boost digital payments, the Union Cabinet has decided to waive the merchant discount rate (MDR) applicable on all debit cards, BHIM and UPI transactions up to Rs 2,000. The government will reimburse the same to the banks for a period of two years, starting January 1, 2018.

“Merchant Discount Rate (MDR) applicable on all debit card/BHIM UPI/ AePS transactions up to and including a value of Rs 2000 will be borne by government for 2 years with effect from 1 January, 2018 by reimbursing same to the banks,” the Cabinet decided on Friday.

"It is estimated that the MDR to be reimbursed to the banks in respect of transactions less than Rs 2,000 in value would be Rs.1,050 crore in FY 2018-19 and Rs.1,462 crore in FY 2019-20," the government release said.

As a result of this approval, for all transactions less than Rs 2000 in value, the consumer and the merchant will not suffer any additional burden in the form of MDR thereby leading to greater adoption of digital payment modes for such transactions. Since such transactions account for sizeable percentage of transaction volume, it will help to move towards a less cash economy.


A committee comprising Secretary Department of Financial Services, Secretary Ministry of Electronics & IT and the CEO, National Payment Corporation of India (NPCI), will look into the industry cost structure of such transactions which will form the basis to determine the levels of reimbursement.

MDR is the rate charged to a merchant by a bank for providing debit and credit card services when payment is made at a merchant point of sale (PoS). In most cases, the charge is passed on to the customer by the merchant, saying that it eats into his margin.

Citing this, many people make cash payments despite having debit cards. Similarly, MDR is charged on payments made to merchants through BHIM UPI platform and AePS.

In order to promote digital payments, the Reserve Bank of India has earlier come out with differentiated merchant discount rates (MDR) for debit card transactions, prescribing separate caps for small and large traders.

Also Read: Debit card transactions to cost lower for customers, but digital players want more from RBI

As per the latest RBI notification, MDR charges for small merchants with an annual turnover of up to Rs 20 lakh has been fixed at 0.40 percent with a cap of Rs 200 per transaction by debit cards through Point of Sale (PoS) machines or online transactions.

For merchants with turnover of over Rs 20 lakh, the MDR cap will be 0.9 percent or Rs 1,000 per transaction, whichever is lower.

Similarly, for accepting QR (quick response) code based acceptance infrastructure, the MDR will be 10 basis points lower across both merchant categories.

# For small businesses, the MDR cap at QR code based infrastructure would stand at 0.3 percent or Rs 200 per transaction, whichever is lower.

# For other merchants, the MDR cap at QR code based infrastructure will be 0.8 percent or Rs 1,000 per transaction, whichever is lower.

However, most players had been unhappy with the RBI move.

A report by Kotak institutional equities had said, “MDR reduction: marginally negative for acquirers. The RBI’s move to reduce merchant discount rates (MDR) for debit card transactions for smaller merchants and QR-code based transactions will likely bode well for broad-based and asset-light adoption of cashless modes of transactions in the medium-term. However, volume is unlikely to make up for the shortfall in reduction of fees in the short term and hence, the near-term impact would be marginally negative for a few players like Axis Bank, HDFC Bank, ICICI Bank and SBI (State Bank of India). Debit card fee is a small but a key area of growth for most of these.”

In a tweet, Amrish Rau, CEO of PayU, said: “RBI has tinkered with Debit charges again. The problem is NOT MDR. Capping of Bank Interchange fees will provide big boost to digital payments.”

Interchange fee is a part of the MDR which is charged by the Issuing bank (0.5-0.75 percent), Acquirer (0.5-0.25 percent) which is also shared by the payment provider such as Rupay, Visa and Mastercard.

Debit card usage volume has tripled to 2.4 billion transactions in 2016-17 from around 800 million in 2014-15. The value of these transactions rose to Rs 3.3 lakh crore from Rs 1.2 lakh crore.

RBI data shows that debit and credit card payments at PoS terminals have increased from Rs 35,240 crore in November 2016, compared to Rs 47,980 crore in November 2017.

The UPI and BharatQR have different MDR, so it will be a challenge for card networks and the NPCI (National payments Corporation of India) 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 percent for payments below Rs 1,000 and 0.65 percent for all other charges.
Beena Parmar
first published: Dec 15, 2017 05:52 pm

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