Lower the merchant discount rate to promote digital payments

The entertainment sector has seen a sharp increase –76.66 per cent – in use of credit and debit cards for making payments. Liquor shops, bars, lounges and discotheques are other segments that have seen strong rise in card payments in the recent times. So what does it mean? It indicates that the growth is being seen primarily in metros or few tier II cities, which can boast of such infrastructure for entertainment as well as use of cards for payments.

While an increase in digital transaction in any segment and geographical area is good news, it could be considered a real achievement only if the rise comes from all segments of the economy as well as non-metro cities as well.

Also, the rise in digital transaction in the last two years is heartening, but the pace of increase is far slower than what it could have been given the size of the Indian economy and the number of transactions, which would be taking place every day.

There are three stakeholders in this card and digital payment eco-system – banks, government and customer. While it’s pointless to blame any signal stakeholder for this slow growth, none of the three has done much to accelerate the pace of digital transactions.

Banks have been pointing to rise in their cost in promoting these transaction, the government has assumed that its responsibility is over after making the law and the customer has not made sufficient attempt to understand what does card transaction means to them.

While laws regarding merchant discount rate (MDR) are there for long but lots of gray area exists on the ground level. The law says small merchants must pay a maximum MDR of 0.4 per cent of bill value of or maximum of Rs 200 per transaction and larger merchants pay 0.9 per cent or maximum of Rs 1,000 per transaction. They can’t charge customers more than the prescribed rates but in practice, merchant selling goods inflate charges, in some cases even 3 per cent of the transaction. There is no way a customer can confront the seller about it.

Why a customer would pay by debit card when in cash it would cost less. The problem can be resolved by forcing establishments using a point of sale (PoS) machine to display charges. Implementation of this is not a tough task. At the time of installation of PoS machine, banks should complete the exercise for the benefit of customers as well as to avoid violation of the law. Also, as the relations of a bank with the merchant are a continuous affair, it would be easier to do.

Also, the Reserve Bank of India, the banking sector regulator, should look at reducing MDR charges further, and play an active role in further upgradation of the technology to reduce the lead time to complete the transaction chain, which essentially means that money moving from the account of buyer of goods to merchant account. There is no reason for these charges to be high as 0.90 per cent. It’s important that over the next few years more transactions should be shifting to card and other digital mode because more the digital transaction lesser would be creation of unaccounted cash in the economy, an avowed promise that the present government of prime minister Narendra Modi made to the masses.