On 6 December 2017, the Reserve Bank of India (RBI) issued guidelines on the maximum merchant discount rate (MDR) that can be levied for debit card transactions, both in percentage and absolute terms. PwC discusses the key inferences and the way forward for the digital payments story in India.
Push for digitisation of micro payments
The MDR guidelines provide further impetus to the government’s efforts towards the digitisation of small transactions.
Driving the growth story of small and medium-sized enterprises
The government has been pushing for the growth story of small and medium-sized enterprises (SMEs) through a number of initiatives such as encouraging banks to lend more to this sector, Goods and Services Tax (GST)2 exemptions for intra-state small traders, being positive towards ideas of green finance in the SME sector and SME-focused sustainable development goals of the United Nations (UN).3
Digitisation is critical to fuel growth in the SME space. Traditionally, SMEs have not been very keen on accepting digital payments as they have faced challenges in absorbing high MDR charges. The guidelines should help reduce these challenges for smaller merchants to some extent.
Let’s consider the purchase of items of different prices at a small retail outlet whose turnover is lower than 20 lakh INR. The diagram below depicts the scenario pre and post the issuance of the guidelines.
The rationalisation of MDR to 0.4% for all debit card transactions for physical point of sale (POS) transactions and further to 0.3% for quick response (QR) based infrastructure should encourage merchants to accept digital payments. An upper cap will help them in better forecasting of charges to be deducted by banks, especially on the sale of items with higher value.
This will, in turn, help them in better cash management and also generate a digital record for availing of innovative credit facilities such as merchant cash advance (MCA).
Further boosting interoperability
The Unified Payments Interface (UPI) has witnessed massive adoption, with transaction numbers touching 105 million and their value reaching 9,679 crore INR in November 2017.4 One of the key features of the UPI is interoperability and Bharat QR-an instrument from the National Payments Corporation of India (NPCI) which is driving its rapid adoption. A merchant doesn’t need to invest in or maintain costly hardware POS infrastructure; a simple QR code displayed at his/her outlet can help customers make payments over a mobile app linked with a card issued by any of the card scheme networks. The guidelines have further rationalised the MDR for QR transactions to 0.3% for smaller merchants and 0.8% for larger merchants, with their respective caps of 200 INR and 1,000 INR. This is a step in the right direction to push digital payments in the person-to-merchant (P2M) category.
Impact on participants in the value chain
While smaller merchants and customers are likely to be positively impacted by the MDR reduction regulations, other stakeholders such as acquirers, issuers and card scheme networks may face challenges in the short term due to reduced revenues per transaction. However, with the increased adoption of digital transactions by smaller merchants and customers, banks are likely to benefit from economies of scales going forward.
Way forward
The guidelines are a step in the right direction to increase the number of SMEs in the formal economy and to help them contribute further to the GDP of the country. With a continuous push by the government for digital payments, the country could witness increased growth in the number of FinTechs and payment innovators in this sector, offering innovative products in micro services and payments, QR-based payments, digital lending based on transaction history, customised loyalty solutions, among others.
Also, regulators may need to consider further steps for rationalisation interchange/scheme charges in line with the current guidelines and further rationalisation of MDR, especially for larger merchants, for the development of sustainable business models for all stakeholders in the ecosystem.
Sources
RBI/2017-18/105 DPSS.CO.PD No.1633/02.14.003/2017-18 Rationalisation of Merchant Discount Rate (MDR) for Debit Card Transactions, December 6 2017. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11183&Mode=0 (last accessed on 7 December 2017)
IANS. (2017). GST: Rs 20 lakh registration exemption not for inter-state traders. The Economic Times.
Borgohain, A. (2017). Now, banks need to take care of SMEs in India: M Venkaiah Naidu. The Economic Times. Retrieved from https://economictimes.indiatimes.com/small-biz/sme-sector/now-banks-need-to-take-care-of-smes-in-india-m-venkaiah-naidu/articleshow/61862064.cms (last accessed on 7 December 2017)
RBI/2016-17/105 DPSS.CO.PD No.1515/02.14.003/2016-17
Rationalisation of Merchant Discount Rate (MDR) for Transactions upto Rs. 2000, December 16 2016. Retrieved from https://m.rbi.org.in//Scripts/NotificationUser.aspx?Id=10780&Mode=0 (last accessed on 7 December 2017)
