How digital payments merchants await debit card reimbursements since Jan

In a bid to encourage electronic payments, the central government in December 2017 decided to bear the MDR applicable on digital transactions worth Rs 2,000 through debit card

In a bid to encourage electronic payments, the central government in December 2017, decided to bear the merchant discount rate (MDR) applicable on digital transactions worth Rs 2,000 via debit card, UPI and Aadhaar-based transactions starting January 2018. Nine months have gone by, but the digital payments industry still awaits reimbursements.

According to a report by Mint, the government of India has already reimbursed the MDRs applicable on these transactions for a period from January to June to the banks. However, the banks have not reimbursed the amount to merchant aggregators and acquirers.

“As far as I am aware, none of the banks has reimbursed for debit card/UPI/AEPS transactions processed from 1 January 2018 till date. Also, major public sector banks like State Bank of India have announced that they will only reimburse 0.15% of the transaction amount to service providers on its debit card transactions accepted at a point-of-sale terminals,” said Vishwas Patel, chairman of Payments Council of India (PCI) told Mint.

The service providers should have been paid 0.25 to 0.30 per cent as they have invested in setting up the acceptance infrastructure. The IT ministry has said that it will reimburse banks up to 0.40% of the transaction amount, according to Patel.

What is MDR?

The MDR is the charge that a merchant has to pay to the bank concerned every time a consumer uses his debit card on the point-of-sales (PoS) machine.It is expressed as a percentage of the transaction amount. Currently, merchants with annual revenues of less than 2 million, the MDR is 0.4 per cent of the transaction value, or Rs 200, whichever is lower. For all others, the MDR is at 0.9 per cent of the transaction value, or Rs 1,000, whichever is lower.

Demonetisation and Modi's Digital India push

There has been a surge in the number of PoS machines since demonetisation was announced by Prime Minister Narendra Modi in November 2016. 

* The number of point-of-sale (PoS) terminals have doubled from 1.5 million in October 2016 to over 3 million in February 2018

* This rise in PoS terminals can be attributed to the sharp additions made in the months immediately following demonetisation

* However, the additions have dropped significantly since then. POS additions during February 2018 did not match even 10% of the additions from December 2017 to March 2017.

Govt's promise to service providers in December 2017

The outgo on account of reimbursement for MDR charges is estimated to be Rs 25.12 billion over the next two years. The amount to be reimbursed to banks could be Rs 10.50 billion in FY 2018-19 and Rs 14.62 billion in FY 2019-20 for transactions of value less than Rs 2,000, said the Union government in December 2016.

“The compensation to banks will help cover the costs incurred in managing card payment operations. This should give push to volumes in digital banking space and enable to beef up merchant acquisition infrastructure,” said P K Gupta, managing director of retail and digital banking, State Bank of India told Business Standard.

What encouraged service providers to use of POS?

Deepak Chandnani, managing director of Worldline, South Asia and Middle East, said, “Benefits to merchants will be two-pronged – one, they will bear zero cost for electronic debit card transactions; two, it will reduce the need and cost of handling cash at the outlet.” The average ticket size for debit card transactions is Rs 1,400-Rs 1,500, bringing the MDR for merchants to zero, according to Vishwas Patel, co-chair of the Payments Council of India.

“In tier-2 and tier-3 cities, the cost of MDR was the biggest pain point for digital transactions. Now instead of banks trying to push, it will be merchants asking for POS machines -- and that’s how the paradigm will change,” he added.

The story as of now

According to PCI, around 80% volume and 60% of the total value of transactions done through debit cards are for a value of below R s2,000. This translates into a significant amount of business cost incurred on such transaction. Hence, the delay in MDR reimbursements is a major concern for the service providers and Modi government's Digital India push.