The government needs to cap the merchant discount rate (MDR) on all types of debit and pre-paid cards at a lower rate of 0.6 percent of the transaction value with a view to end distortions in the card payment ecosystem and promote digital transactions, suggested a recent study.
The study by the Indian Institute of Technology Bombay further suggested that an upper ceiling of Rs 150 could be fixed for a prescribed MDR of 0.6 percent.
"To encourage digital payments where cash is a strong alternative, for small and medium merchants accepting POS based payments, and having annual turnover of at most Rs 2 crore, the MDR for all types of debit and pre-paid cards, for transactions up to Rs 2,000, could be fixed with a cap of 0.25%, while for transactions exceeding Rs 2,000, the cap could be 0.6%," it said.
Currently, for businesses with an annual turnover of Rs 20 lakh or more, the debit card MDR is capped at 0.9 percent of the transaction value or Rs 1,000, whichever is lower.
To maintain parity, alongside the revision of MDR caps, the extant mandates that currently promote excessive free cash withdrawals should be revised, it said.
Notably, for the year 2018 and 2019, to promote small ticket debit card merchant transactions up to Rs 2,000, the government had made MDR zero for the merchants, and provided banks monetary support, towards MDR at the rate of 0.4 percent. However, with effect from 1 January 2020, the government made MDR zero for every transaction using RuPay debit cards only.
Neither merchants nor the government paid the banks any MDR for such merchant transactions. However, banks were allowed to impose MDR on the merchants for every transaction using MasterCard/VISA debit cards, it said.
The study also made a strong case for removing Goods and Services Tax (GST) on POS machines with the overall objective of enhancing infrastructure for digital transactions.
The discriminatory approach adopted by the card payment networks to supervise their own 'no surcharge rule', for credit cards, needs to be addressed by regulator RBI, it said.
RBI needs to promote static Bharat QR with caution because of its associated shortcomings of the usage of expensive credit/debit cards. Separating out BHIM-UPI QR embedded in static Bharat QR could mitigate possible negative sentiments towards QR codes, it said.