Merchant discount rate is the percentage of a sale transaction that a merchant pays to the bank as a fee for facilitating transactions using a credit or debit card. The rate is typically shared at the back end among the card-issuing bank, the merchant-acquiring bank and the network operators.
Historically, the merchant discount rate on debit card transactions has been regulated by the Reserve Bank of India (RBI). Immediately before the December 2017 revisions, it was 0.25% for transactions up to Rs1,000 and 0.5% for transactions between Rs1,000 and Rs2,000.(1)
No merchant discount rate limits on transactions using credit or pre-paid cards have been prescribed and parties may commercially agree applicable rates and charges in respect of credit cards and pre-paid cards.
On December 6 2017 the RBI's merchant discount rates circular(2) revised the regulatory merchant discount rate framework for debit card transactions with a significant policy shift: rates will now be determined not merely on the basis of transaction value, but also on a merchant's size (determined by turnover). Therefore, large merchants with high turnovers will be required to pay a higher merchant discount rate to banks.
The circular prescribed the following limits for debit card transactions (as of January 1 2018):
- Small merchants (ie, turnover of up to Rs2 million in the previous financial year) – merchant discount rates of:
- 0.4% (Rs200 cap per transaction) for physical point of sale and online transactions; and
- 0.3% (Rs200 cap per transaction) for quick response (QR) based card processing infrastructure.
- Other merchants (ie, turnover exceeding Rs2 million in the previous financial year) – merchant discount rates of:
- 0.9% (Rs1,000 cap per transaction) for physical point of sale and online transactions; and
- 0.8% (Rs200 cap per transaction) for QR-based card processing infrastructure.
Following the merchant discount rate circular on December 27 2017, the Ministry of Electronics and Information Technology announced the roll out of a programme to subsidise merchants for merchant discount rates on low-value transactions, with the aim of bringing cash transaction costs into line with non-cash transaction costs.(3) According to the ministry's subsidy notification:
- banks must not charge any merchant discount rates for debit card, Bharat Interface for Money – Unified Payments Interface (BHIM UPI)(4) and Aadhar Pay(5) transactions equal to or less than Rs2,000;
- between January 1 2018 and March 31 2018, the government will reimburse banks 0.4% of the value of debit card, BHIM UPI and Aadhar Pay transactions equal to or less than Rs2,000; and
- banks must file claim forms with the government and submit periodic reports and certificates on transactions using debit card, BHIM UPI and Aadhar Pay transactions.
The RBI circular and government notification establish a new regulatory framework for setting limits on and payments of merchant discount rates and encouraging digital payments. However, while merchant discount rate transaction limits were clearly established, several aspects remain unclear.
The merchant discount rate circular categorises merchants into 'small' and 'other' based on turnover, but offers no criteria for determining these categories – for example, will it be determined by merchants themselves (ie, self-declaration) or by the banks based on a certificate from the merchant's statutory auditor (ie, dependent on the audited accounts for the immediately preceding financial year)?
Card not present transactions (ie, online payments) are often routed through payment gateways. Whether non-bank online payment gateways must comply with the merchant discount rate circular requirements or whether they are eligible to claim the merchant discount rate subsidy under the government's subsidy notification remains uncertain.
Further, the subsidy notification provides for a reimbursement to banks of 0.4% of the transaction value for transactions up to Rs2,000 with all merchant categories. However, under the merchant discount rate circular, banks may charge 0.8% to 0.9% for transactions with large merchants. Whether banks may charge merchants 0.3% to 0.5% of the transaction value and claim a 0.4% government reimbursement or whether all merchant discount rate charges must be claimed via government reimbursement (this will be capped at 0.4% in all cases) also remains uncertain.
An important aspect of moving towards digital transactions is a feasible revenue structure for banks and network operators (each of which provide the necessary infrastructure and systems for digital and card-linked transactions). In its effort to curb transaction costs for merchants, the government should be careful not to impose significant charges on other system participants.
For further information please contact Shilpa Mankar Ahluwalia or Suswagata Roy at Shardul Amarchand Mangaldas & Co by telephone (+91 11 4159 0700) or email (firstname.lastname@example.org or email@example.com). The Shardul Amarchand Mangaldas & Co website can be accessed at www.amsshardul.com.
(1) See the RBI's Circular on Special Measures up to March 31 2017: Rationalisation of Merchant Discount Rate (MDR) for Transactions up to Rs2,000 (RBI/2016-17/184 DPSS.CO.PD.No.1515/02.14.003/2016-17), December 16 2016.
(2) See the RBI's Circular on Rationalisation of Merchant Discount Rate (MDR) for Debit Card Transactions (RBI/2017-18/105 DPSS.CO.PD No. 1633/02.14.003/2017-18), December 6 2017.
(3) See the Ministry of Electronics and Information Technology's Notification on Subsidising MDR Charges on Debit Cards/BHIM UPI/Aadhar Pay Transactions of Value Less Than or Equal to Rs2,000.
(5) Aadhar Pay is the interoperable and instantaneous digital payment platform for merchants that allows payments to be received from customers through Aadhar-based authentication operated by the National Payments Corporation of India.
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