MDR rules must be kept simple, if the govt is keen on promoting digtal payments

After a couple of months of quiet time, the merchant discount rate (MDR) controversy is back to making headlines. This time it is RBI that has jumped into the fray by defining merchant discount rate. Instead of having rates based on value of transactions, RBI has decided to slot merchants into different categories and based on their previous year turnover they would be charged MDR. These rates, which are going to applicable from January 2018, are likely to create more confusion than clarity. The end result would be that digital payment system, which is still in infancy in our country and which should be promoted, would suffer a setback.

As per RBI new circular, merchant with a turnover of less than Rs 20 lakh in previous financial year will be charged maximum of 0.40 per cent of value of transaction or maximum of Rs 200 per transaction. Whereas, merchant with more than Rs 20 lakh of annual turnover would be charged maximum of 0.90 per cent of value of transaction or maximum of Rs 1,000. Now this limit of Rs 20 lakh itself is something, which will create confusion. The pertinent question here is, will bankers be allowed access to financial book of merchants? If not, why have a system that creates an incentive for merchants to tell a lie or increase compliance burden?

Secondly, if the net margin of a merchant is 4 per cent on a product, he/she will not be ready to sacrifice almost one fourth of the margin. Either the merchant will not use point of sale (POS) machine or he/she is going to ask customers to pay for it if they want to use debit card. Now why would a customer pay more money for using a legitimate way of transaction? In the end, both might settle for cash transaction and the entire purpose will get defeated.

To understand this conundrum, we need to figure out who genuinely needs to get paid for transaction that is happening through electronic system. Is it the card issuer or the entity that is facilitating the payment by building the infrastructure? Now in the case of banks, do they incur so much cost that for every transaction happening through their system they should be paid 0.20 per cent? Yes, POS machines cost them, but merchants pay for them. Also, they can recover their costs when digital payments reach a certain level in the country.

In fact, if need be, the government has to subsidise the banks in creating the necessary infrastructure. The reason is simple. Payments made through debit cards leave a trail and a merchant cannot avoid indirect tax on that sale. Thus, it will be the tax revenue that will see a rise when payments are made through electronic means.

Another aspect of this whole MDR issue is the customer awareness. Even today, there are scores of places where customers are not aware that there is a limit to MDR charges or that they are not, but the seller who is supposed to bear it. In tier II and tier III cities, where it is imperative for digital payment to be successful, merchants pass this burden on to customers and ask for higher payment if it is made by debit cards.

Why can’t a law be passed that makes it compulsory for merchant establishment to display prominently about the MDR charges and the fact that customers are not supposed to pay it. As far as implementation is concerned, banks that are selling POS machines can be entrusted with the responsibility of making sure that merchants display it. For the digital payment system to be successfully implemented, the regulator should hold the hands of small stakeholders of the system rather than the large banks.