What the new MDR structure means for all stakeholders involved

Recently, the RBI announced a revision of the Merchant Discount Rate (MDR) with an objective to push for cashless transactions and to ensure that the process is economically viable for all stakeholders.

The revised rates have generated a strong reaction from the community, leading to a debate on the feasibility of this initiative. In a bid to safeguard the ‘Digital India’ objective, the government further announced a subsidy on MDR for transactions done using debit cards, UPI, BHIM, and Aadhaar-enabled payment up to Rs 2,000. Despite this, the new MDR structure faces resistance due to complexities at various levels. Presented herewith is a broad overview of the impact of the revised MDR on various segments.

What is the new MDR?

• For annual turnover of up to Rs 20 lakh:

Card transactions = 0.40 percent of transaction value

QR code transactions = 0.30 percent of transaction value

Maximum MDR for both capped at Rs 200 per transaction

Previously, for transactions up to Rs 1,000, MDR = 0.25 percent (irrespective of merchant turnover).

• For annual turnover above Rs 20 lakh:

Card transactions = 0.90 percent of transaction value

QR code transactions = 0.80 percent of transaction value

Maximum MDR for both capped at Rs 1,000 per transaction

Previously, for transactions upto Rs 2,000, MDR = 0.50 percent (irrespective of merchant turnover).

• Government subsidy = no MDR on transactions up to the value of Rs 2,000, for a period of two years (applies to debit card, UPI, QR, and Aadhaar-linked transactions).

Impact of revised MDR on digitisation:

• As of November 2017, 83 crore debit cards contributed to 36,500 crore in transaction value at POS across the country. Further, the average ticket size of these transactions was under Rs 2,000. Therefore, this move will further boost debit card transactions.
• Asset-light methods of acceptance like Bharat QR to gain a foothold in the market due to reduced MDR.
• Further, the move will largely encourage enrolment of unorganised retailers like small grocery stores, roadside vendors, local outlets, and auto/taxi drivers, which constitute up to 90 percent of total retailers in India — a vast majority that also records an average transaction under the value of Rs 2,000.

What it means for each stakeholder

Retailers (merchants)

• The old MDR rates structure was based on transaction value and did not differentiate between merchant sizes. The revised MDR being categorised as per-merchant turnover is set to protect the interest of very small-to -mall merchants. Because of the subsidy, there will be no barrier from merchants for transactions below Rs 2,000.
• Smaller merchants, who are part of a larger e-marketplace, may be adversely impacted because their turnover is attached to that of the larger e-marketplace, automatically impacting them with a higher MDR (for turnover above Rs 20 lakh), despite their individual turnover being relatively less (below Rs 20 lakh).In all likelihood, industry players will get together to regulate and protect the interests of smaller merchants and help create a balanced and economically viable ecosystem for online marketplaces.
• Supermarkets, malls, travel & leisure, hospitality, and food & beverage retailers, who record average transaction value higher than Rs 2,000, are also at loss as the revised MDR of 0.90 percent is higher than the previous rate of 0.75 percent, causing an impact on earnings.

Issuing banks

• Though the rates have been revised downwards, it will come as a welcome move for debit card-issuing banks as it is certain to generate more transactions on debit cards.

Acquiring banks and payment facilitators        

• Currently, with 800 million debit card users and only 2.9 million POS terminals, the need for expansion of POS infrastructure is urgent. The reduction of MDR and subsidy will encourage expansion of POS infrastructure.
• The process of merchant categorisation for new MDR rates will burden acquirers with the responsibility of validating the merchant turnover.

The inequitable distribution of MDR has been a matter of discontent especially amongst acquiring banks and payment facilitators, who have been developing the merchant acceptance market but are operating on very thin margins.An industry initiative to regularise the ratio of split in the interchange rate, such that it can be a fair distribution among acquiring banks, issuing banks, and payment facilitators will be the first step towards a collaborative digital payments ecosystem.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)