What the new MDR structure means for all stakeholders involved

Recently the RBI announced a revision of the MDR (Merchant Discount Rate) with an objective to push for cashless transactions and to ensure 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 INR 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 INR 20 Lakhs:

Card transactions = 0.40% of transaction value
QR code transactions = 0.30% of transaction value
Maximum MDR for both capped at INR 200/ transaction
Previously, for transactions upto INR 1,000, MDR = 0.25% (Irrespective of merchant turnover)

  • For annual turnover above INR 20 Lakhs:

Card transactions = 0.90% of transaction value
QR code transactions = 0.80% of transaction value
Maximum MDR for both capped at INR 1000/ transaction
Previously, for transactions upto INR 2,000, MDR = 0.50% (Irrespective of merchant turnover)

  • Government subsidy = No MDR on transactions up to the value of INR 2,000, for a period of 2 years  (Applies to Debit card, UPI, QR and Adhaar linked transactions)

Impact of revised MDR on Digitization:

  • As of Nov 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 INR 2,000. Therefor this move will further boost debit card transactions.
  • Asset-light methods of acceptance mode like BharatQR to gain a foothold in the market due to reduced MDR.
  • Further, the move will largely encourage enrollment of unorganized retailers like small grocery stores, roadside vendors, local outlets and auto/ taxi drivers, which constitute up to 90% of total retailers in India – a vast majority that also records an average transaction under the value of INR 2000

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 categorized as per merchant turnover, is set to protect the interest of very small to small merchants. Because of the subsidy, there will be no barrier from merchants for transactions below INR 2000
  • Smaller merchants, who are part of a larger e-market place, 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 INR 20 Lakhs), despite their individual turnover being relatively less (Below 20 Lakhs). 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 INR 2,000, are also at loss as the revised MDR of 0.90% is higher than the previous rate of 0.75%, causing an impact on earnings.
  • Supermarkets, malls, travel & leisure, hospitality and food & beverage retailers, who record average transaction value higher than INR 2,000, are also at loss as the revised MDR of 0.90% is higher than the previous rate of 0.75%, 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 categorization 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 regularize 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.

Sharing his views, Mr. Jose Thattil, Co-Founder and CEO, Phi Commerce said, ‘These are hugely exciting times for payment facilitators like Phi Commerce. Given the anticipated multi-fold increase in transaction volumes originating from newer customer segments, newer merchant categories and newer use cases, processing platforms need to be highly scalable and robust. At the same time, payment facilitators will have to focus on innovating and designing new solutions in such a way that the overall unit cost of acquiring transactions reduces.

This article by us appeared in Yourstory. It can be read here:  
https://yourstory.com/2018/01/new-mdr-structure-means-stakeholders-involved/

960

Leave a Reply

Your email address will not be published. Required fields are marked *