Card Payment Player Splits Over Merchant Discount Rate

RBI’s decision to cap charges that small shops will pay to banks on debit card transactions has led to a squabble on how the fees are distributed. These charges are termed as merchant discount rate (MDR) as they are discounted from the money transferred to the shopkeeper’s account. At stake is getting another 20 lakh shops on board digital payments, which is behind schedule.

On one side are debit card issuing banks which get a lion’s share of the MDR supported by payment networks like Visa, MasterCard and Ru-Pay. And on the other, are payment companies that enrol merchants and install point of sale terminals on behalf of lenders. For debit users, the settlement of this row will decide whether kirana stores start accepting card payments.

In an attempt to get small shops to accept card payments, the RBI last week lowered the MDR for businesses with a turnover of below Rs 20 lakh to 0.4%. While the RBI has decided that the merchant will pay less, it has not interfered on the distribution of the charges. Historically, the distribution has been in favour of card issuers with around 70% of the MDR being fixed as interchange fee. Merchant acquirers are now up in arms saying that there will not be incentives to deploy more terminals if the old method of fee distribution continues.

Card-issuing banks justify higher interchange partly to cover cashback and other incentives they provide. They say card charges have never been a deterrent in acceptance and it is the behaviour that needs to be changed. Card-issuing banks say this is the reason why even in shops which freely accept cards majority payment is in cash despite 80 crore debit cards.

Merchant acquirers have not been in a position to pull their weight in this tussle because they install machines on behalf of banks. For instance, merchant acquirers First Data’s network comes under ICICI Bank (since the payment is processed through a bank). Also, some of the large debit-card issuing banks like HDFC Bank and SBI have in-house merchant acquiring divisions and are not getting into this tussle.

MD & CEO PayU Rau Amrish said “there is a need to cap the interchange (fees paid to payment networks and banks) at half the MDR. The rates prescribed by the RBI are the maximum that can be charged and banks are free to fix a lower fee. If 50% of the fees are allotted to the acquirer, then there is potential to further bring down rates for merchants. Otherwise, the maximum rate will also become the floor rate”.