Merchant discount rate | Faded print from RuPay: MDR pricing to blame?

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Here, we assess the trends and progress in debit card use since November 2019. Although the Covid-19 pandemic has distorted the trends into two periods, our goal here is to get a general idea of ​​the possible impact of MDR on debit card use.

By Bhavna Sharma & Ashish Das

To promote low-cost debit card merchant transactions up to Rs 2,000, the government, in calendar years 2018 and 2019, made the merchant discount rate (MDR) zero for merchants and made provided banks with monetary support to MDR, @ 0.4%. In contrast, effective January 1, 2020, the government reduced the MDR to zero for each transaction using RuPay debit cards only. Neither the traders nor the government paid MDR banks for such RuPay based business transactions. However, banks were allowed to impose MDR on merchants for every transaction using Mastercard / VISA debit cards.

Here, we assess the trends and progress in debit card use since November 2019. Although the Covid-19 pandemic has distorted the trends into two periods, our goal here is to get a general idea of ​​the possible impact of MDR on debit card use.

In 2020, with around Rs 6.34 lakh crore of debit card transactions, the government abolished the merchant’s zero MDR scheme on banknotes up to Rs 2000, for transactions made through Mastercard / VISA debit cards. . Merchants thus paid around Rs 1,154 crore for Mastercard / VISA transactions of less than Rs 2,000 that year, compared to zero in 2018 and 2019.

Between early September 2018 and late August 2019, there was a net issuance of approximately 4.65 crore of RuPay debit cards and approximately 4.28 crore of accounts were added as part of the PMJDY. On the other hand, for the following two corresponding mandates, we see a moderate issuance of RuPay debit cards despite the addition of a good number of PMJDY accounts (respectively 65 lakh and 3.63 crore from September 2019 to August 2020, and 1.51 crore and 2.77 crore in September 2020 to August 2021).

The growing gap between new PMJDY accounts and RuPay debit cards is alarming. Unless there are other external causes, a possible cause for such a trend could be that banks have deliberately moved away from RuPay to promote a card system that generates more revenue for them.

To assess the status of RuPay debit cards, we compare the annual growth of new PMJDY accounts opened, RuPay debit cards issued (under PMJDY) and the total number of debit cards in circulation. Although the annual growth of new PMJDY accounts opened has been relatively constant, we see a general decline in the annual growth of RuPay debit cards issued. While on the one hand, the year-on-year growth of Rupay debit cards issued under the PMJDY was declining, on the other hand, there was a sharp increase in the year-on-year growth of the global card outstanding. of debt. This reflects an implicit increase in the year-over-year growth of Mastercard / VISA debit cards. In recent months, the annual growth of mastercard / VISA debit cards is well over 5% unlike that of RuPay debit cards.

The MDR debit card on its own has limited impact in determining a merchant’s preference for a particular card (over cash), as it is just one of the few others. costs associated with accepting the card. When cash is an alternative and the merchant attaches importance to “cost to merchant” even though the MDR of the debit card is zero, the merchant needs to think twice. This is so since he has to pay (i) the high MDR of the credit card @ 2-4% and (ii) the high monthly rents in the range of Rs 200-600 for the point of sale terminals ( POS), etc. Thus, the preference for merchant acceptance of the debit card is not entirely guided by the MDR debit card alone since there are other deterrents, for many small and medium-sized traders.

For the payments sector, the provision of RuPay debit cards by banks would be impacted due to tiered pricing administered on the MDR. The MDR pricing administered for RuPay is zero while for mastercard / VISA it is 0.4-0.9%. In the presence of such imbalanced administered pricing, and with merchant preference for card acceptance also being driven by considerations other than MDR debit cards, the debit card supply by banks is narrowly limited. title to products (Mastercard / VISA), which generate higher MDRs. (exchange) or income for them, and therefore the same is promoted by banks. Due to dual administered pricing, competition does not translate into identical diffusion of debit card products, resulting in loss of welfare for society in the form of (i) the exhausting choice of merchants and retailers. consumers to exploit the advantages of zero MDR on RuPay (due to the lack of adequate supply of RuPay debit cards) and (ii) banks no longer having the capacity to produce RuPay as a means of payment for merchants (due to commercial considerations).

Mastercard / VISA debit cards that generate income via MDR may be unfair to RuPay, but this is just the beginning. It is likely that the current approach is only a temporary measure to test the reaction of the card payments market. We also notice that the asset-lite mobile phone-based BHIM-UPI is cannibalizing the payments arena.

Card acceptance is usually done through a combined credit / debit / prepaid card acceptance product. MDR for credit cards is unregulated and therefore an expensive proposition for merchants. Merchants can choose to activate for card acceptance; However, it may not be advisable for all small and medium-sized merchants to go for the relatively expensive card acceptance, especially where BHIM-UPI exists. BHIM-UPI does not cost traders anything under applicable laws. To keep the country away from cash, we need an equivalent digital alternative, simple, practical and secure, such as the BHIM-UPI. As of September 2021, there were 365.58 BHIM-UPI crore transactions, for a total of Rs 6.55 lakh crore.

RBI provided daily payment network data for BHIM-UPI and debit cards. Comparing the trends since November 2020, we see that BHIM-UPI volumes have steadily increased, while debit card transaction volumes show signs of declining. Currently, BHIM-UPI achieves nearly 13 crore in daily transactions, compared to less than 1 crore for debit cards.

With RBI’s ban on direct debit payments in recurring transactions and the upcoming restrictions on the storage of debit card details by merchants, this is bound to create enough friction for people to switch to ways of paying. alternative payments such as BHIM-UPI.

To address the distortions present in the card payment ecosystem, the existing law needs to be redesigned to allow low MDR payment and uniformly controlled across all card payment systems. One can take inspiration from the MDR ceilings reasonably set by NPCI for RuPay debit cards before 2020. To maintain parity, along with a review of the MDR ceilings, existing mandates that currently encourage excessive free cash withdrawals should be revised. . In addition to arriving at the number of free cash withdrawals from ATMs, the RBI should arrive at an object-based threshold for the amount of free cash withdrawals per month beyond which banks should discourage cash withdrawals. ‘cash.

Edited excerpts from the IIT Bombay technical report (October 2021) entitled Merchant Transactions through Debit Cards

The authors are respectively at the SP Jain School of Global Management and the Mathematics Department of the Indian Institute of Technology, Bombay.

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