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http://dspace.library.iitb.ac.in/jspui/handle/100/25218 IIT Bombay Technical Report (September 2020) Merchant transactions through debit cards costs and prices Ashish Das Department of Mathematics Indian Institute of Technology Bombay Mumbai-400076, India Indian Institute of Technology Bombay Powai, Mumbai-400 076, India
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http://dspace.library.iitb.ac.in/jspui/handle/100/25218 IIT Bombay Technical Report (September 2020)

Merchant transactions through debit cards – costs and prices

Ashish Das

Department of Mathematics

Indian Institute of Technology Bombay

Mumbai-400076, India

Indian Institute of Technology Bombay

Powai, Mumbai-400 076, India

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Merchant transactions through debit cards

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Merchant transactions through debit cards

1

Merchant transactions through debit cards –

costs and prices*

Ashish Das

Department of Mathematics, Indian Institute of Technology Bombay, Mumbai 400076

September 22, 2020

Executive Summary

1. To promote small ticket debit card merchant transactions up to Rs 2000, the

government during the calendar years 2018 and 2019 made merchant discount rate

(MDR) zero for the merchants, and provided banks a monetary support, towards MDR,

@ 0.4%. In contrast, effective January 1, 2020, the government made MDR zero for

every transaction using RuPay debit cards alone. Neither merchants nor the government

paid the banks any MDR for such merchant transactions. However, banks were allowed

to impose MDR onto the merchants for every transaction using mastercard/VISA debit

cards.

The cost to merchants

2. For the period January-July 2020, with about Rs 3.3 lakh crore1 worth of debit card

merchant transactions, the government has done away with the merchant’s zero MDR

regime on ticket sizes up to Rs 2000, for transactions that were done through

mastercard/VISA debit cards. A simple projection implies that merchants would be

burdened in the calendar year 2020 in the range of Rs 1000 crore to Rs 2300 crore

depending upon the MDR ranging between 0.4% and 0.9% for mastercard/VISA’s sub Rs

2000 ticket transactions, as against nil burden in calendar years 2018 and 2019.

3. Thus, if ‘cost to merchant’ is an important attribute for merchant’s choice for card

acceptance and the bank’s desire to provide the card acceptance infrastructure, how

would it impact continuation of the card acceptance trend? Also, what would be the

consequence of the discriminatory approach adopted for RuPay cards?

* The views expressed are those of the author and not necessarily of the institution to which he belongs. Dr. Ashish Das is a Professor of Statistics with the Indian Institute of Technology Bombay. E-mail:

[email protected] 1 1 crore = 100 lakh = 10 million

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2

The price RuPay pays

4. During the one-year period early-September 2018 through end-August 2019, there had

been a net issuance of about 465 lakh RuPay debit cards and about 428 lakh accounts

were added under Pradhan Mantri Jan-Dhan Yojana (PMJDY). In contrast, for the

corresponding tenure during early-September 2019 through end-August 2020, we see a

subdued issuance of about 65 lakh RuPay debit cards despite about 363 lakh PMJDY

accounts added. It alarms to see an expanding gap between new PMJDY accounts added

and RuPay debit cards issued. Unless there are other extraneous causes, a possible cause

for such a trend could be that banks have deliberately moved away from RuPay and

promote a card scheme which generates more revenue for them.

5. To assess the correct status of RuPay debit cards, we compare the y-o-y growths of

new PMJDY accounts opened, RuPay debit cards issued under the PMJDY and the

overall debit cards outstanding. Though y-o-y growth of new PMJDY accounts opened

was relatively consistent, we see a steep decline in y-o-y growth of RuPay debit cards

issued. While on one hand y-o-y growth of Rupay debit cards issued under the PMJDY

was shrinking, on the other hand there was a sharp uptick in y-o-y growth of overall debit

cards outstanding. This reflects an implicit increase in y-o-y growth of mastercard/VISA

debit cards. We call this the whiplash of the zero MDR policy.

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Percentage growth of debit cards - RuPay vs. mastercard/VISA

PMJDY accounts RuPay mastercard/VISA

RuPay – ‘Killing Me Softly with His Song’

6. The Chart showcases the negative impact of zero MDR on RuPay debit cards issued

and the unintended thrust it provided to mastercard/VISA. The good intentions of the

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Merchant transactions through debit cards

3

present discriminatory structure has actually impeded our country’s “Make in India”

initiative, and inadvertently promoted “Made in USA” products. Such a trend needs to be

arrested by appropriate policy intervention, or else RuPay may pay a price of fading over

time.

The trade-off

7. The extant policies of the government and Reserve Bank of India (RBI) have

inadvertently increased the MDR expenses over that in calendar years 2018 and 2019,

especially for the small and medium merchants. There are two contrary aspects to such an

increase.

(A) The increase in the net “cost to merchant” is good for the development and increased

acceptance of debit cards, and

(B) The increase in net MDR expenses for small and medium merchants, is bad for

promoting increased usage of debit cards.

If (A) holds (and merchants pay a controlled MDR), there was no need for the induced

discrimination between RuPay and mastercard/VISA. The same ‘cost to merchant’ could

have been achieved by arriving at a lower controlled MDR, uniform across all card

schemes.

However, if (B) holds, by putting zero MDR restrictions only for RuPay and

discriminatorily allowing mastercard/VISA to impose MDR onto merchants (especially

small and medium merchants), we have not quite achieved the desired results, unlike the

government’s strategy of zero MDR for merchants for the two calendar years 2018 and

2019, when the government bore the associated costs.

We have to choose between (A) and (B).

8. The debit card MDR alone has a limited impact in determining a merchant’s choice or

preference for acceptance of a particular card (over cash) as it is just one of the few other

costs associated with card acceptance. Where cash is an alternative and where the

merchant attaches significance to ‘cost to merchant’, even if debit card MDR is zero, the

merchant should think twice to agree to accept cards. This is so since he has to pay for (i)

the high credit card MDR @ 2-4% and (ii) the high monthly rentals in the range of Rs

200-600 for point-of-sale (POS) terminals, etc. Thus, the preference for debit card

acceptance by the merchant is not quite guided by debit card MDR alone since there exist

other deterrents, for many small and medium merchants.

9. For the payments industry, the supply of RuPay debit cards by the producers (banks)

would be impacted due to differentiated administered pricing on MDR. The administered

MDR pricing for RuPay is zero while for mastercard/VISA it is 0.4-0.9%. In presence of

such an imbalanced administered pricing, and with merchants’ preference for card

acceptance also being guided by considerations other than debit card MDR, the supply of

debit cards by banks gets appositely restricted to products (mastercard/VISA), which

generate higher MDR (interchange) or revenue for them, and as a result the same is being

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4

promoted by the banks. Because of the twin administered pricing, competition is not

resulting in an identical spread or supply of the debit card products, leading to a welfare

loss to the society in form of (i) merchants’ and consumers’ depleting choice to harness

the benefits of zero MDR on RuPay (due to lack of adequate supply of RuPay debit

cards), and (ii) banks no longer having the capacity to produce RuPay as a means for

merchant payments (due to commercial considerations).

10. As it stands now, mastercard/VISA have been provided open grounds to see

promotion of their cards and demotion of RuPay cards. With over 1500 consumer-to-

government payment touch points, what transpires is that on one hand the government is

ready to pay MDR for all mastercard/VISA card transactions, enriching

mastercard/VISA, while on the other hand the government is not ready to pay and thus

relegate our home grown payment product, the RuPay. The lack of a level playing field

would only give more earnings for mastercard/VISA at the cost of equitable promotion of

RuPay. Not to mention the loss to our country’s foreign exchange, even if

mastercard/VISA may remit abroad only 20% of their debit card transaction fees. By

providing a level playing field for RuPay, we can allow some of the debit card transaction

fees to stay within India. Creating a competitive atmosphere for RuPay can only give

more scope for martercard/VISA to compete and improve their product.

Debit cards unparalleled to BHIM-UPI

11. Mastercard/VISA debit cards generating revenue through MDR may be unfair for

RuPay, but this is just a beginning. It is likely that the present approach is only a

temporary measure to test how the card payments market responds. Though it is a fact

that card-based merchant payments have worked well internationally on the principle of

MDR, it is our endeavour to arrive at a rational and non-discriminatory balance, to come

out of the present impasse on MDR. For the present discussion, we restrict ourselves to

debit cards alone, keeping aside the asset-lite mobile phone based BHIM-UPI, which is a

different class altogether.

12. Acceptance of cards is usually via a combined credit/debit/pre-paid card acceptance

product. The MDR for credit cards is not regulated (reigns as high at 2% to 4%) and thus

is an expensive proposition for merchants. Merchants choose to enable themselves for

card acceptance, knowing well that it would amount to acceptance of credit cards along

with debit cards. As such it may not be advisable for all small and medium merchants to

go for the relatively expensive card-based acceptance when, as an alternative to cash,

there exists an asset-lite mobile payment mode, the BHIM-UPI, that does not cost the

merchants anything under extant laws. Moreover, BHIM-UPI does not practically need

any great effort by banks since merchants on their own (like you and me) can generate

and deploy a BHIM-UPI QR code corresponding to a bank account. Moving the country

away from cash would hinge on having an equivalent, simple, convenient and secure

digital alternative like the BHIM-UPI in this era of mobile phones.

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Merchant transactions through debit cards

5

3

3.5

4

4.5

5

5.5

6

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BHIM-UPI Volume - Daily, Average and Month-end total

Jun-Sep'20 Mean (Jun) Mean (Jul) Mean (Aug) Mean (Sep)

134

150

162

180 Proj.

Jun-20 Jul-20 Sep-20Aug-20

Standing on the shoulders of a giant – The rising of BHIM-UPI

13. In the card payments system, merchant on-boarding is an expensive proposition for

banks. It includes costs that banks have to bear on backend infrastructure and

maintenance, guaranteeing cyber security to mitigate frauds, customer service and

protection, building awareness, etc.

Guidance for policy

14. To address the distortions present in the card payment ecosystem, we provide some

guidance for policy. The extant law needs a relook so as to allow low and controlled

MDR to be paid uniformly across all card payment schemes. Taking cue from the MDR

caps reasonably set by NPCI for RuPay debit cards prior to 2020, we give the following

specific suggestions.

For all E-com based payments irrespective of the merchant category, the MDR for

all types of debit and pre-paid cards could be fixed with a cap of 0.6%.

For all POS based payments for merchants having annual turnover in excess of Rs

two crore, the MDR for all types of debit and pre-paid cards could be fixed with a

cap of 0.6%.

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 two crore, the MDR for all types of debit and pre-paid cards, for

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transactions up to Rs 2000, could be fixed with a cap of 0.25%, while for

transactions exceeding Rs 2000, the cap could be 0.6%.

For a prescribed MDR of 0.6%, there could be a ceiling of Rs 150 on the MDR

amount.

The government may consider to reduce the GST for POS terminals.

Any monthly/annual charges imposed by the banks and system providers, for the

card acceptance POS/payment gateway (PG)/mobile app infrastructure, should be

capped by RBI for small and medium merchants having annual turnover of at most

Rs two crore.

For ease of market comparison of no-frill payment products, any fees related to

card acceptance merchant services should be included for disclosure in the RBI

mandated schedule of service charges of banks and system providers.

To maintain parity, alongside the revision of MDR caps, the extant mandates that

currently promote excessive free cash withdrawals should be revised.

Apart from arriving at the number of free ATM cash withdrawals, RBI should

arrive at an object-based threshold for the amount of free cash withdrawal per

month beyond which banks should desirably disincentivize cash withdrawals by

charging reasonably. The threshold could be appropriately set by RBI.

15. Finally, to mitigate some impediments in the larger digital payments space beyond

debit cards, we highlight some salient issues and suggestions that needs explicit attention

of RBI and the government to dwell on:

(i) The discriminatory approach adopted by the card payment networks to supervise

their own “no surcharge rule”, for credit cards, needs to be addressed by the regulator.

(ii) RBI’s extant rules (effective January 2018) debars costs associated with debit card

acceptance being explicitly passed on to consumers either by merchants or the

banks/system providers. RBI needs to setup a forensic audit, where systemic trails exists

of systematic violations of ‘no surcharging on debit cards’ (especially in the E-com

merchant payments), and ensure that consumers are protected against such defaults.

(iii) RBI should prohibit discriminatory incentives, based on a bank’s vested interest,

for different digital payment modes on the same front-end platform.

(iv) 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.

(v) RBI should consider using the Payments Infrastructure Development Fund (PIDF) to

promote BHIM-UPI or similar payment products.

(vi) RBI and the government should consider promoting extensive radio and television

awareness campaigns for the mobile based BHIM-UPI or similar payment products.

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Merchant transactions through debit cards

7

Acknowledgements

The author is thankful to few officers of banks (issuers and acquires), payment

facilitators, card payment networks, RBI and the finance ministry for some very

interesting and informative informal interaction. The interactions helped in understanding

the thought process of all the major stakeholders in our quest for developing a guidance

for policy. In the report all possible care has been taken to project the correct picture

using the data gathered. Deviations, if any, are inadvertent.

“Where the mind is without fear and the head is held high

Where knowledge is free

Where the world has not been broken up into fragments

By narrow domestic walls

Where words come out from the depth of truth

Where tireless striving stretches its arms towards perfection

Where the clear stream of reason has not lost its way

Into the dreary desert sand of dead habit

Where the mind is led forward by thee

Into ever-widening thought and action

Into that heaven of freedom, my Father, let my country awake.”

― Rabindranath Tagore, Gitanjali.

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Merchant transactions through debit cards

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Merchant transactions through debit cards

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I. Introduction

1. Debit cards are issued by banks for facilitating bank account holders towards

interoperable ATM cash withdrawal and carrying out merchant transactions. Such debit

cards are issued under card schemes – primarily mastercard, VISA and RuPay.

Historically, card payments for merchant transactions had a well-defined revenue

generating structure for banks, where the revenue came from Merchant Discount Rate2

(MDR).

2. In order to set catalysts for the digital payment systems, Government of India on

February 29, 2016 came out with cabinet approved guidelines for the ‘Promotion of

Payments through Cards and Digital means’. The Finance Ministry’s office

memorandum provides broad guidelines on the way forward for promotion of digital

payments. Among several measures for wider adoption of card/digital transactions, two

specific measures therein were to take steps to “rationalize MDR on card transactions”

and to ensure that the card holders are not imposed a charge for using such digital

means of payment.

The history of MDR regulation

3. In September 2012, Reserve Bank of India (RBI) mandated to cap debit card MDR at

0.75% for transactions valued up to Rs 2000 and 1% for transactions valued above Rs

2000. This continued till November 8, 2016.

4. Immediately after the demonetization of the specified bank notes on November 8,

2016, the government instructed the banks to temporarily waive MDR imposed on

merchants.

5. As an interim measure, RBI effective January 1, 2017 rationalized the MDR on debit

cards by capping it at (i) 0.25% for transactions valued up to Rs 1000, (ii) 0.5% for

transactions valued in excess of Rs 1000 but not exceeding Rs 2000, and (iii) 1% for

transactions valued in excess of Rs 2000. RBI's new caps on debit card MDR were a

substantial reduction to the RBI's pre-demonetization cap of 0.75% for transactions

valued up to Rs 2000.

6. Subsequently, effective January 1, 2018, RBI tweaked MDR rules claiming that such

tweaks would encourage some small businesses to accept debit card payments. For

2 Merchant Discount Rate or Merchant Discount Fee is a service charge that banks take from merchants

accepting card/digital payments, which is usually a certain percentage of the transaction amount. The

MDR paid by merchants is shared between acquirer banks, payment facilitators, issuer banks and the

card payment networks. Here the term ‘acquirer’ can be used in two different context. It is always a

bank that acquires a payment transaction, however a merchant can be acquired either by a bank or by a

payment facilitator.

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businesses with annual turnover below Rs 20 lakh, RBI capped the debit card MDR at

0.4% of transaction value or Rs 200, whichever is lower. For others, i.e., businesses

with annual turnover of Rs 20 lakh or more, the debit card MDR was capped at 0.9% of

the transaction value or Rs 1000, whichever is lower. For QR-code based debit card

acceptance, the MDR caps were set 10 basis points lower than the physical point-of-sale

(POS) and online debit card acceptance infrastructure.

7. In parallel, effective January 1, 2018, the government made MDR zero for the

merchants and decided to bear the MDR cost for two years on all debit card transactions

valued up to Rs 2000. However, for the banks, the government fixed the MDR at 0.4%

for debit card transactions up to Rs 2000. In effect, due to the government’s

intervention, RBI’s decision to allow banks to charge up to 0.9% as MDR for businesses

with annual turnover of Rs 20 lakh or more (even for transaction amounts less than Rs

2000), got overruled and the banks got only 0.4% as MDR for such sub Rs 2000 ticket

transactions.

8. Corresponding to this government provided MDR of 0.4%, the interchange3 fixed by

card payment networks had been 0.15%. Thus, RBI’s MDR mandates could never get

implemented since the government felt otherwise on small ticket transactions up to Rs

2000 and reduced the MDR to zero for all merchant categories.

9. In fact, National Payments Corporation of India (NPCI) was the only card network to

adopt an MDR that was lower than the MDR cap set by RBI. The MDR pricing

structure arrived at (effective October 2019) for RuPay debit card had been 0.4% (0.3%

when the transaction is QR-code based) for transactions up to Rs 2000 and 0.6% (0.5%

when the transaction is QR-code based) for transactions exceeding Rs 2000, with a

ceiling on MDR of Rs 150 for any transaction. For transactions exceeding Rs 2000,

RuPay’s 0.6% MDR applied only to businesses with annual turnover of Rs 20 lakh or

more (vis-à-vis RBI’s MDR cap of 0.9%).

The present avatar of MDR

10. Effective January 1, 2020, the government decided not to bear MDR any further on

all debit card transactions valued up to Rs 2000.4 In effect, due to this decision, RBI’s

mandate got re-invoked and banks got the leverage to charge MDR @ 0.9% or less from

businesses with annual turnover of Rs 20 lakh or more for transactions of any value.

Furthermore, for businesses with annual turnover of less than Rs 20 lakh, banks got the

freedom to impose an MDR of 0.4% or less.

3 Interchange or issuer interchange is the share of the MDR that the issuer bank keeps as their

commission. Thus, MDR comprises of the interchange and the acquirer’s commission. The commission

out of an acquired payment transaction is shared with the payment facilitator, if they are involved in

routing the transaction. 4 Earlier banks were getting reimbursements of 0.4% MDR for transactions upto Rs 2000 from

Ministry of Electronics and Information Technology (MeitY).

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11. Nevertheless, the government simultaneously brought in a new law where RuPay

debit card had been identified as a prescribed payment mode for which banks and

system providers could no longer charge any fee to the merchants. Consequently, any

charge, including the MDR, was no longer applicable on payments made through RuPay

debit cards.

12. While taking such a step, the government envisage that among low-cost digital

modes of payment, RuPay debit cards (and not mastercard/VISA debit cards) will

promote less cash economy through their extensive use for P2M (person-to-merchant

payment) transactions. The underlying philosophy is that neither merchants nor

consumers should get any feel of extra cost while adopting such a digital mode of

payment. An impression given is that RBI and banks will be able to absorb the

associated costs from the savings that will accrue to them on account of handling less

cash, as people move to this digital mode of payment.

The law

13. The government under Section 10A of the Payment and Settlement Systems (PSS)

Act, 2007, indicate that no bank or system provider shall impose, whether directly

or indirectly, any charge upon a person making or receiving a payment by using

the electronic modes of payment prescribed under section 269SU of the Income-tax Act,

1961. In the Income-tax Rules, 1962, a new Rule 119AA has been inserted that

prescribe RuPay debit card and BHIM-UPI as the electronic modes of payment for the

purpose of Section 269SU.

14. Technically, this implies that banks shall not levy any charges to a person for

payments made or received through RuPay debit card and BHIM-UPI. There is a subtle

difference in these two modes of digital payment – RuPay debit card (or debit cards in

general) can only be used to pay a person who has been acquired as a merchant by a

bank/payment facilitator, while BHIM-UPI can be used to pay into a bank account of a

person without any particular need for a bank to acquire that person as a merchant.

15. With the new law prohibiting banks and system providers to charge for these

payment modes, we find a persistent debate on MDR. Though it is a fact that card-based

merchant payments have worked well internationally on the principle of MDR, we need

to clearly demarcate in applying the same principle for the asset-lite mobile phone based

BHIM-UPI (which has the potential to substitute our day-to-day cash requirements).

16. Debit card usage as a digital means for payment is more involved and is not as

straight forward as BHIM-UPI. As a substitute of cash, the front-ends involved for debit

card usage (both issuing and acceptance infrastructure/mechanism) are an expensive

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proposition. Thus, focusing on debit cards alone, we relook at the issues surrounding

MDR and provide possible solutions in a holistic manner.

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II. Banks and system providers

17. To harmonise a way forward for the banks, early January 2020, the Indian Banks’

Association (IBA) made a move when 15 major banks came together to decide what

should be the MDR for mastercard/VISA debit cards. Considering the government’s

agenda of promoting digital transactions and encouragement to merchants for promoting

low value transactions, the IBA indicated that the banks reached a consensus on MDR.

For transactions up to Rs 2000, the applicable MDR should be 0.4% irrespective of the

merchant category.

18. Like the government, IBA too did not feel it appropriate to charge a high MDR of

up to 0.9% (irrespective of the ticket size) for all merchants having annual turnover of

Rs 20 lakh or more. This, possibly raises doubt on RBI’s December 2017 regulation,

where it had removed the concept of MDR based on ticket size and set a very low

benchmark of Rs 20 lakh to categorise small and medium merchants. Actually, that may

have triggered the government to intervene, and now IBA too.

19. The norms recommended by the banks that mostly prevail for mastercard/VISA

debit cards are:

a) MDR cap @ 0.4% for businesses with annual turnover of less than Rs 20 lakh.

b) For businesses with annual turnover of Rs 20 lakh or more,

i. MDR capped @ 0.4% for transactions up to Rs 2000.

ii. MDR capped @ 0.9% for transactions above Rs 2000.

Moving towards a lower controlled MDR

20. IBA’s new norm is not quite in sync with RBI’s attempt, starting January 2018, to

eliminate the concept of MDR based on ticket size (which prevailed since September

2012). It is felt that had RBI’s merchant categorisation been more rationale, we would

not have seen intervention by the government with such vigour.

21. In all this zero or low MDR mess, what had been at stake is the banks’ and system

providers’ revenue losses from large merchants like Vodafone, Reliance, Flipkart,

Amazon, Big Bazaar, IRCTC, Air India, and many more, where they have been kept at

par with small and medium merchants, with respect to small ticket transactions up to Rs

2000. Moreover, it does not make sense to see only RuPay debit cards offering zero

MDR to small, medium and large merchants while mastercard/VISA debit cards

imposing MDR @ 0.4-0.9%.

22. What is possibly missing is the payment industry’s will to see a modification of the

merchant categorization, where a lower controlled MDR is set for small, medium and

large merchants after a more rational merchant categorised than RBI’s present

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categorization. There is an urgent need for a reasonable definition of large merchants for

the purpose of MDR.

An international perspective

23. Recently the Bank for International Settlements (BIS) published its Annual

Economic Report – 2020 that devotes an exclusive chapter on ‘central banks and

payments in the digital era’. Therein, we see how price controls (or no control) in the

digital payments space play a significant role in efficiently moving away from cash.

24. The cost for processing some of the more common modes of retail merchant

payments differ. To quote from the BIS-2020 report, “Cash, debit and credit cards each

involve different front-end costs, i.e. the costs incurred in processing payment

transactions at the counter. Cash also requires back office processing. For debit and

credit cards, nearly all of the processing costs are “merchant service costs” – fees that

the merchant pays to the bank issuing the cards, the bank acquiring the card payment

and the card network operators (Graph III.2).”

Merchant service costs are important for card payments3 Marginal cost, EUR cents

3Data for Europe (AT, BE, DE, ES, FR, GB, IT, NL, PL and SE), 2015.

The graph reflects a scenario in which merchants were asked to assess

fixed or variable costs for accepting cash, debit card and credit card

payments for a €25 transaction over a three- to four-year time horizon.

Graph III.2: The costs of payments are higher for cards than cash

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25. The ‘merchant service costs’ is the fees in form of MDR, etc. that the banks charge

from the merchants. To a greater extent, the MDR for small and medium merchants

dissuades card acceptance. The BIS-2020 report further mentions that “Indeed, card

networks typically involve three or four parties to process transactions, with various

and sometimes opaque fees. These include interchange fees among banks and licence

fees to card networks. Even across cards, fees vary considerably; premium cards come

with additional perks for users – particularly higher-income ones – paid for with an

annual fee, but also with higher costs for merchants (nearly double the costs of non-

premium cards). Those costs are not always transparent to end users; and even if they

are, misaligned incentives mean that the choices of payment method do not consider

overall system efficiency. Authorities have taken a range of actions to lower card fees.”

26. The principle of credit card is completely different from that of debit card because

of the very nature of the payment product, which involves a risk of credit and the

associated cost of credit. An international practice of demarcating the acceptance

principle behind credit cards (where surcharging5 may be allowed) and that of the debit

cards (where surcharging is not allowed) is well-known.6 Moreover, it is also practiced

in India where RBI is non-committal when it comes to credit cards, but has prohibited

surcharging in case of debit cards.

5 A surcharge is an extra fee charged by a merchant when receiving a payment by credit card or debit

card (but not cash) which at least covers the cost to the merchant of accepting that means of payment,

such as the MDR imposed by an acquirer bank.

A surcharge may be prohibited by card payment networks, but the enforcement of the prohibition is not

uniform. Some jurisdictions have laws which require, allow, regulate or prohibit a merchant imposing a

surcharge. If no surcharge is permitted, the merchant's costs are borne by the merchant, who may

incorporate the burden in its prices. In some jurisdictions, when a customer pays with cash, the

merchant may offer a discount. 6 The status of “no surcharge rule” – International scenario

Australia, Mexico and New Zealand: Credit and debit card payment surcharge is permitted.

However, there is a ban on merchants from charging payment surcharges that are excessive, i.e., from

charging a customer more than what it costs the merchant to process the payment. A merchant is not

required to impose a payment surcharge, but if it chooses to then it is only allowed to pass on to the

customer the costs that the merchant was charged for accepting card payments.

United States of America: As a result of a legal settlement to resolve claims brought by a group of

merchants, effective January 27, 2013, all merchants may add a surcharge to certain credit card

transactions. The ability to surcharge applies only to credit card purchases, and only under certain

conditions. The merchants may assess a surcharge on credit card purchases that does not exceed the

MDR for the applicable credit card surcharged. However, only eleven states (California, Colorado,

Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, Texas and Puerto Rico)

have laws that prohibit merchants from charging consumers with surcharges on credit card

transactions. However, throughout the country, merchants cannot surcharge debit card or prepaid card

purchases.

Europe: Under payment rules in Europe, effective January 13, 2018, certain types of payment

surcharging are banned. The ban applies to all consumer cards, which includes debit and credit cards.

The surcharge ban aims to protect consumers across Europe by prohibiting merchants from charging

consumers additional fees for making payments by certain payment methods. For example, merchants,

including ticketing, travel and food delivery websites, are no longer allowed to charge consumers

additional fees for paying by debit or credit card.

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The Indian scenario – impediments in credit and debit cards

27. Though RBI has prohibited surcharging in case of debit cards, however for credit

cards, RBI has neither prohibited nor allowed surcharging. As a result we see a

discriminatory setup existing in the credit card surcharging front. We see many

instances where merchants are not given the freedom to surcharge on credit cards by the

acquiring banks, citing card payment networks’ ‘no surcharging rule’7. Alongside we

also see many instances of rampant violation of card payment networks’ own ‘no

surcharging rule’, by the acquiring banks and the payment facilitators. In fact,

agreements between merchants and acquirer banks/payment facilitators are setup, where

the acquirer banks or the payment facilitators themselves apply a payment surcharge on

merchant’s behalf. This persists with the card payment networks’ knowledge.

28. Though RBI regulates and supervises the payment and settlement systems, and has

provided the licence to the card payment networks for their operations in India, the

discriminatory approach adopted by the card payment networks to supervise their

own “no surcharge rule”, for credit cards, needs to be addressed by the regulator.

For, we should not allow discrimination between merchants, orchestrated by banks and

system providers (with the knowledge of the card payment networks), when it comes to

deviating from the “no surcharge rule”, for India’s RBI approved credit cards. Usually

smaller merchants, without much negotiating power, succumb to such discrimination.

29. Though the question of allowing or not allowing a surcharge for credit cards is

outside the scope of the present focus, just to mention, it has some degree of inherent

implication in terms of merchants not only favouring cash, but also rejecting any card

(credit and debit card) as a payment mode. The merchant’s burden to accept a credit

card (with MDR @ 2-4%), subdues the zeal to accept debit cards (with MDR @0-0.9%)

since the two come bundled together. For a more detailed discussion on this topic, we

refer to the papers Das and Das (2016) and Das (2019) (see references [6] and [9]).

30. A related aspect concerns the prevailing policy for merchant payments, where RBI’s

extant rules (effective January 2018) debars costs associated with debit card acceptance

being passed on to consumers either by merchants or the banks/system providers.

Despite extant regulations, this is an area where RBI could not supervise lapses. Under a

good business model, banks and their facilitators wanted to acquire big merchants, but

many such merchants (like government service providers, government tax collectors,

educational institutions, utility providers, etc.) resisted to bear the MDR costs for the

payments service. Banks in turn, by means of a merchant/submerchant agreement, resort

7 The “no surcharge rule” states that no merchant must require any cardholder to pay a surcharge or any

part of any merchant discount or any contemporaneous finance charge in connection with a transaction.

Here, a surcharge means any fee charged in connection with a payment transaction that is not otherwise

charged, if another payment method is used. The liability to ensure compliance of the “no surcharge

rule” lies with the acquirer banks acquiring the transactions.

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to conniving with the merchants to pass this MDR onto the consumers by adding a

payment surcharge at the payment gateway (PG) that is setup by the bank/facilitator.

For more details on this aspect, we refer to the paper by Das (2019) (see reference [9]). Despite bringing the issue to the notice of RBI, acquirer banks’ surcharging on debit

cards usage in India continued in violation of RBI’s statutory regulations (with RBI's

knowledge) at the cost of digitally paying consumers. Apart from lack of capacity to

supervise such noncompliance (especially in the E-com merchant payments), there

is also an inertia on part of the regulator to bring in awareness among consumers,

who may get charged for using a debit card. RBI needs to setup a forensic audit,

where systemic trails exists of systematic violations, and ensure that consumers are

protected against such defaults.

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III. From cash to cards

31. Debit cards are extensively used by bank account holders towards cash withdrawal

at ATM. Currently RBI and banks are absorbing significant costs while they provide

cash as a prominent mode of payment. The promotion of excessive cash needs to be

arrested in such a way that it not only reduces cash handling costs for the banks but also

saves enough to support digital payments.

Cash from ATM

32. Cash is predominantly promoted in India with 8 to 10 free ATM withdrawals per

month. This potentially amounts to bank’s disbursement of at least Rs one lakh of free

cash per month to an individual holding a bank account. While keeping 17 months of

wash-out period in between the pre- and post-demonetisation periods, Figure 1 shows

how the debit card usage at ATM behaved during the pre-demonetisation period April

2015 – October 2016 and the post-demonetisation period April 2018 – October 2019. It

is clear that in absolute terms there had not been any significant respite from

predominant usage of ATM in the country. The period starting November 2019 has

been dealt separately since RBI, in its monthly ATM data dissemination, has started

reporting cash withdrawal at ATM using debit cards, instead of debit card usage at

ATM.

5000

5500

6000

6500

7000

7500

8000

8500

9000

Ap

r-2

01

5

Jun

-20

15

Au

g-2

01

5

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-20

15

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c-2

01

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r-2

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Ap

r-2

01

9

Jun

-20

19

Au

g-2

01

9

Oct

-20

19

Lakh

ATM withdrawals Volume

6-month Mov. Avg.

Pre-demo Post-demoWash-out period

80000

130000

180000

230000

280000

Ap

r-2

01

5

Jun

-20

15

Au

g-2

01

5

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-20

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c-2

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-20

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r-2

01

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-20

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g-2

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r-2

01

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-20

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g-2

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c-2

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r-2

01

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-20

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g-2

01

8

Oct

-20

18

De

c-2

01

8

Feb

-20

19

Ap

r-2

01

9

Jun

-20

19

Au

g-2

01

9

Oct

-20

19

Rs

Cro

re

ATM withdrawals Value

6-month Mov. Avg.

Pre-demo Post-demoWash-out period

Source: RBI

Figure 1: Debit card usage at ATM during the pre- and post-demonetisation

33. Figure 2 shows how the cash withdrawal at ATM using debit cards behaved during

the period November 2019 – July 2020. The period since March 2020 show the effects

of COVID-19 lockdown and partial unlocks. As such, even if we supplement with more

recent National Financial Switch (NFS) off-us ATM data till August 2020, as shown in

Figure 3, we see no respite from predominant usage of ATM for cash withdrawals in the

country.

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100000

150000

200000

250000

300000

350000

0

1000

2000

3000

4000

5000

6000

7000

No

v-19

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Ap

r-2

0

May

-20

Jun

-20

Jul-

20

Val

ue

(R

s C

rore

)

Vo

lum

e (

Lakh

)

Cash withdrawal at ATM

Volume Value

Source: RBI

Figure 2: Cash withdrawal at ATM using debit cards

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Jan

'18

Feb

'18

Mar

'18

Ap

r'1

8M

ay'1

8Ju

ne

'18

July

'18

Au

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18

De

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19

May

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Jun

'19

Jul'1

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ug'

19

Sep

'19

Oct

'19

No

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9D

ec'

19

Jan

'20

Feb

'20

Mar

'20

Ap

r'2

0M

ay'2

0Ju

n'2

0Ju

l'20

Au

g'2

0

Lalh

ATM cash withdrawal Volume

NFS Inter Bank ATM Cash Withdrawal 12-month Mov. Avg.

0

20000

40000

60000

80000

100000

120000

140000

160000

Jan

'18

Feb

'18

Mar

'18

Ap

r'1

8M

ay'1

8Ju

ne

'18

July

'18

Au

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May

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Jun

'19

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9A

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19

Sep

'19

Oct

'19

No

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9D

ec'

19

Jan

'20

Feb

'20

Mar

'20

Ap

r'2

0M

ay'2

0Ju

n'2

0Ju

l'20

Au

g'2

0

Rs

Cro

re

ATM cash withdrawal Value

NFS Inter Bank ATM Cash Withdrawal 12-month Mov. Avg.

Source: NPCI and RBI

Figure 3: NFS inter bank ATM cash withdrawal using debit cards

34. But for RBI’s mandate allowing significant amount of cash withdrawals free for

many bank customers, technically speaking, banks would not have incurred such

avoidable and non-remunerating expense. There is nothing that RBI appears to have

done as a deterrent, which strongly prompts a reduction of large amounts of free cash

withdrawals in a month. Digital payment modes are now amply available even where

large and frequent cash is still in use. RBI advocating banks to charge a reasonable fee,

in a tiered fashion, for total cash withdrawals in excess of a reasonable amount per

month, could create enough deterrents. Such a move would allow generating desirable

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21

revenue for the banks to meet their cash handling costs and to provide support towards

digital payments infrastructure costs.

Merchant transactions using debit cards

35. Figure 4 shows the trend for debit card merchant payments during the period April

2015 – October 2019, where we have indicated a wash-out period of 17 months to

account for the disturbances due to demonetisation. Clearly, under a controlled MDR-

revenue model, debit card usage and acceptance for merchant payments has shown a

consistent growth.

700

1200

1700

2200

2700

3200

3700

4200

4700

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r-2

01

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-20

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-20

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-20

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-20

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Lakh

Merchant transactions Volume

6-month Mov. Avg.

Pre-demo Post-demoWash-out period

10000

20000

30000

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60000

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80000

Ap

r-2

01

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re

Merchant transactions Value

6-month Mov. Avg.

Pre-demo Post-demoWash-out period

Source: RBI

Figure 4: Debit card merchant transactions during the pre- and post-demonetisation

36. The use of debit cards, in value terms, is quite prominent among e-commerce (E-

com) merchant transactions. Since November 2019, RBI, in their monthly RBI bulletin,

has started disseminating a bifurcated card transaction data comprising POS based and

‘others’. For debit cards, ‘others’ primarily include E-com transactions, card to card

transfers and digital bill payments through ATMs. We use this POS based data and the

combined POS cum E-com data provided in the monthly “Bank-wise ATM/POS/Card

Statistics” that RBI releases, to derive the extent of E-com transactions. Accordingly,

Figures 5 and 6 show the extent of POS vis-à-vis E-com transactions. Even before the

COVID-19 pandemic, in value terms, the E-com transactions had been more than one-

third of the debit card merchant transactions. The effect of COVID-19 related

lockdowns and partial unlocks on physical retail shops had its impact in decreasing the

gap between POS and E-com transactions.

37. In value terms, before COVID-19, E-com had a consistent share of about 37% of

debit card merchant transactions. The share of E-com over POS transactions has

increased during COVID-19. For bank account-based transactions, the decreasing trend

in debit card acceptance at POS is also attributed to the fear of COVID infection. In

such a situation, BHIM-UPI become a better choice for all. Unlike E-com, cash is

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always an alternative for POS, more so since POS is an expensive proposition for many

small and medium merchants. However, such merchants need to be migrated from cash

and enabled (even without being acquired as merchants) for the asset-lite BHIM-UPI.

Towards this, it would help to see RBI and the government promoting extensive

radio and television awareness campaigns for the mobile based asset-lite BHIM-

UPI.

37

00

7

39

74

0

38

90

7

36

25

8

27

23

8

90

05

18

81

4 25

78

8

25

82

1

20

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2

22

25

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23

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18

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01

8

0

7500

15000

22500

30000

37500

45000

Nov.19 Dec.19 Jan.20 Feb.20 Mar.20 Apr.20 May.20 Jun.20 Jul.20

Rs

Cro

re

Merchant transactions Value

POS based E-com based

Source: RBI

Figure 5: Share of POS and E-com merchant transactions using debit cards (value)

64 64 63 63

57

39

50

5552

36 36 37 37

43

61

50

4548

0

10

20

30

40

50

60

70

Nov.19 Dec.19 Jan.20 Feb.20 Mar.20 Apr.20 May.20 Jun.20 Jul.20

Pe

rce

nta

ge

Share of debit card transactions (Value) in POS and E-com

POS based E-com based

Source: RBI

Figure 6: Percentage share of POS and E-com transactions (value)

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38. For the period April 2019 – July 2020, Figure 7 shows the extent of debit card

transactions using RuPay and mastercard/VISA. Both in volume and value terms,

during the pre-COVID times (April 2019 – February 2020), the share of RuPay

transactions had been consistently growing. The zero MDR policy saw an initial

momentum of RuPay transactions growing even beyond November 2019 and then later

showed some relative growth because of the decline in discretionary expenditure of

urban population due to COVID lockdowns – there was a fall in transactions by the

non-PMJDY account holders (urban affluent/middle class) holding mastercard/VISA

debit cards rather than RuPay debit cards, linked to PMJDY accounts. This resulted in a

rise in the share of RuPay transactions over mastercard/VISA. However, with things

unlocking, we now see the share of RuPay transactions declining. From April 2020 to

July 2020, the share of RuPay transactions consistently declined by over 4.5%, both in

terms of volume (34.8% to 30.1%) and value (30.7% to 26.2%). The share of RuPay

transactions has declined to below January 2020 levels.

20

30

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80

Ap

r-20

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Jun

-201

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Jul-

201

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019

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RuPay and mastercard/VISA debit card volume share

RuPay mastercard/VISA

20

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r-2

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Jul-

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Pe

rce

nta

ge

RuPay and mastercard/VISA debit card value share

RuPay mastercard/VISA

Source: RBI and NPCI

Figure 7: Percentage share of RuPay and mastercard/VISA transactions

39. Finally, for POS based card transactions, we access the extent of credit card swipes

alongside debit card swipes. In value terms, Figure 8 shows the credit card and debit

card usage during the period November 2019 through July 2020. On an average, the

credit card usage had been 46% of the combined debit and credit card swipes.

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31

73

0

35

15

7

35

12

4

33

44

6

26

65

6

80

52

13

47

0

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29

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00

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25

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0

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20000

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40000

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v-20

19

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-201

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Jan

-20

20

Feb

-20

20

Mar

-202

0

Ap

r-20

20

May

-20

20

Jun

-202

0

Jul-

202

0

Rs

Cro

rePOS based credit and debit card transactions Value

Credit Card Debit Card

Source: RBI

Figure 8: POS based credit and debit card transactions (value)

40. As a consequence of Figure 8, we infer that the debit card MDR alone has a limited

impact in determining a merchant’s choice or preference for acceptance of a particular

card (over cash) as it is just one of the few other costs associated with card acceptance.

Where cash is an alternative and where the merchant attaches significance to ‘cost to

merchant’, even if debit card MDR is zero, the merchant should think twice to agree to

accept cards. This is so since he has to pay for (i) the high credit card MDR @ 2-4%

and (ii) the high monthly rentals in the range of Rs 200-600 for POS terminals, etc.

Thus, the preference for debit card acceptance by the merchant is not quite guided by

debit card MDR alone since there exist other deterrents, for many small and medium

merchants.

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25

IV. Costs and prices

41. We now need to address three pertinent questions.

(i) Given that there is zero MDR on RuPay alone, would there be an increase in the card

acceptance desire at merchant locations?

(ii) If ‘cost to merchant’ is an important attribute for merchant’s choice for card

acceptance and the bank’s desire to provide the card acceptance infrastructure, how

would it impact continuation of the card acceptance trend?

(iii) What would be the consequence of the discriminatory approach adopted for RuPay

cards?

42. The Watal Report8 highlights the breakup (in value terms) of debit card transactions

up to Rs 2000 and more than Rs 2000 (see Table 1). Nearly 65% of the total values of

debit card transactions fall in the sub Rs 2000 ticket category, and all these transactions

would now attract MDR within the RBI set cap of 0.4-0.9%, for about 71% of the total

debit card usage amount (i.e., of mastercard/VISA usage but not RuPay).9

Table 1: Distribution of debit card transactions in value terms

Source: Shri Ratan P. Watal Report “Committee on Digital Payments –

Medium Term Recommendations to Strengthen Digital Payments Ecosystem”

8 Report of the Committee on Digital Payments headed by Shri. Ratan P Watal, December 2016.

Ministry of Finance, Government of India. 9 The 65% figure for the share (in value terms) of the sub Rs 2000 ticket transactions is based on

information gathered by the Payments Council of India (PCI) in 2016. Accordingly, we need to apply a

caveat. Any computation of the overall MDR amount (for sub Rs 2000 ticket transactions) based on

PCI’s information alone is subject to rectification. Based on appropriate market intelligence a more

precise figure can be used. However, in absence of any published information on the same, the author

has refrained from using the market intelligence. However MeitY, who reimbursed MDR @ 0.4% to

banks for such sub Rs 2000 ticket transactions, can better guide on the correct percentage figure for the

share (in value terms) of the sub Rs 2000 ticket transactions.

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43. Thus, starting January 1, 2020, merchants are paying MDR for sub Rs 2000 tickets,

contributed by about 71% of the value of debit card transactions. With the government

no longer bearing the MDR, the banks’ re-imposition of debit card MDR @ 0.4-0.9%

has affected the small and medium merchants when mastercard/VISA debit cards get

swiped. Now, with this being the only source of MDR revenue in the debit card

business for banks, it creates a strong potential for RuPay debit cards being

marginalized in due course. We discuss more on this later in this section.

The increased MDR burden for small and medium merchants

44. In Table 2, we present the debit card data for January-July 2020 and compute the

merchant payoffs towards MDR for sub Rs 2000 ticket transactions. Prior to this, the

government had made such MDR zero for merchant for calendar years 2018 and 2019.

Unlike pre-January 2020, for the first seven months of 2020, when about 71% of the sub

Rs 2000 ticket debit card transactions (in value terms) attracted MDR @ 0.4% from

merchants (including small and medium merchants), it amounted to a total payoff of Rs

601 crore. When projected (linear projection) for the full year 2020, the MDR payoff

amounts to Rs 1030 crore. These figures would more than double when MDR is applied

@ 0.9%. As we see businesses picking up in the second half of 2020, the estimated

annual MDR payoff amounts, based on the first seven months of 2020, are likely to be

underestimates.

Table 2: Debit card transactions and computation of MDR payoffs

Value

(Rs Crore)

Debit

cards

(1)

RuPay

cards

(2)

mastercard/

VISA cards

(3)

Sub Rs 2000

transactions

@65% of (3)

(4)

MDR

Revenue

@0.4% of (4)

(5)

MDR

Revenue

@0.9% of (4)

(6)

Jan-2020 62154 16728 45425 29526 118 266

Feb-2020 57841 15902 41938 27260 109 245

Mar-2020 47646 13745 33902 22036 88 198

Apr-2020 22998 7051 15947 10366 41 93

May-2020 37622 11438 26183 17019 68 153

Jun-2020 47255 14180 33076 21499 86 193

Jul-2020 49840 15234 34606 22494 90 202

Jan-Jul 2020 325355 94278 231077 150200 601 1352

Jan-Dec 2020 1030 2317Projection → Source: RBI/NPCI and author’s computation

45. But for the COVID-19 lockdowns in the country, the level of debit card transactions

would have been much higher and would have led to much larger MDR payoffs by the

debit card accepting merchants. Though effective January 1, 2020, there is a zero MDR

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for RuPay debit cards, the extant policies of the government and RBI have inadvertently

increased the MDR expenses over that in calendar years 2018 and 2019, especially for

the small and medium merchants. There are two contrary aspects to such an increase.

(A) The increase in the net “cost to merchant” is good for the development and

increased acceptance of debit cards, and

(B) The increase in net MDR expenses for small and medium merchants, is bad for

promoting increased usage of debit cards.

If (A) holds (and merchants pay a controlled MDR), there was no need for the induced

discrimination between RuPay and mastercard/VISA. The same ‘cost to merchant’

could have been achieved by arriving at a lower controlled MDR, uniform across all

card schemes.

However, if (B) holds, by putting zero MDR restrictions only for RuPay and

discriminatorily allowing mastercard/VISA to impose MDR onto merchants (especially

small and medium merchants), we have not quite achieved the desired results, unlike the

government’s strategy of zero MDR for merchants for the two calendar years 2018 and

2019, when the government bore the associated costs.

We have to choose between (A) and (B).

Discriminatory approach for RuPay debit cards – the price paid

46. So, how would the system work now without any revenue stream for RuPay debit

card (a prescribed mode of payment)? Also, how would the system work in presence of

the induced discrimination between RuPay and mastercard/VISA?

47. Though the zero MDR for RuPay debit card will lead to some savings for

merchants, an important question remains as to whether it would serve the purpose of

promoting card payments in the presence of merchants still being overburdened on the

fee for accepting other cards (cards other than RuPay debit cards). Note that for

mastercard/VISA, effective January 1, 2020, the merchants no longer enjoy zero MDR

on transactions up to Rs 2000. Could the answer lie in allowing merchants, at their

discretion, not to accept cards other than RuPay debit cards? Surely not!

48. As it stands now, mastercard/VISA have been provided open grounds to see

promotion of their cards and demotion of RuPay cards. With over 1500 consumer-to-

government payment touch points, what transpires is that on one hand the government is

ready to pay MDR for all mastercard/VISA card transactions, enriching

mastercard/VISA, while on the other hand the government is not ready to pay and thus

relegate our home grown payment product, the RuPay. The lack of a level playing field

would only give more earnings for mastercard/VISA at the cost of equitable promotion

of RuPay. Not to mention the loss to our country’s foreign exchange, even if

mastercard/VISA may remit abroad only 20% of their debit card transaction fees. By

providing a level playing field for RuPay, we can allow some of the debit card

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transaction fees to stay within India. Creating a competitive atmosphere for RuPay can

only give more scope for martercard/VISA to compete and improve their product.

49. How should the government and RBI solve this complex problem? If there is a

revenue differential for banks between RuPay and mastercard/VISA, banks would

always, in their commercial interest, tend to promote that card scheme which generates

more revenue for them. Department of Financial Services (DFS), Ministry of Finance,

disseminates data to reflect progress-report of Pradhan Mantri Jan-Dhan Yojana

(PMJDY). The time series data is released every Wednesday updating information on

the number of accounts opened under PMJDY, and RuPay debit cards issued. We have

used this data to show monthly status. We take data points of every Wednesday of a

month falling during 2nd through 8th of each month. Such monthly data points are used

to reflect the status at the end of the previous month and is shown in Table 3.

Table 3: Progress-report of the PMJDY

Month-end Date

Number of total

beneficiaries

(Lakh)

Deposits in

Accounts

(Rs Crore)

Number of RuPay

debit cards issued

to beneficiaries

(Lakh)

Aug-18 05-Sep-18 3261.3 82491.0 2455.8

Sep-18 03-Oct-18 3288.2 85378.6 2468.7

Oct-18 07-Nov-18 3319.4 84689.1 2614.1

Nov-18 05-Dec-18 3345.7 84814.5 2644.3

Dec-18 02-Jan-19 3372.8 87033.4 2688.0

Jan-19 06-Feb-19 3425.6 90217.4 2684.6

Feb-19 06-Mar-19 3487.2 93567.2 2760.4

Mar-19 03-Apr-19 3539.4 97665.7 2789.4

Apr-19 08-May-19 3563.6 98437.4 2773.4

May-19 05-Jun-19 3580.6 98473.7 2804.6

Jun-19 03-Jul-19 3606.2 100495.9 2844.9

Jul-19 07-Aug-19 3655.0 101879.3 2891.3

Aug-19 04-Sep-19 3688.9 102645.7 2920.8

Sep-19 02-Oct-19 3718.8 104698.0 2944.8

Oct-19 06-Nov-19 3742.3 106846.6 2964.9

Nov-19 04-Dec-19 3765.9 107904.1 2970.0

Dec-19 08-Jan-20 3782.8 111714.8 2979.8

Jan-20 05-Feb-20 3803.6 114569.1 2907.6

Feb-20 04-Mar-20 3822.1 117015.5 2920.4

Mar-20 08-Apr-20 3812.3 127748.4 2900.6

Apr-20 06-May-20 3840.5 131825.5 2896.6

May-20 03-Jun-20 3904.2 131339.6 2926.8

Jun-20 08-Jul-20 3982.4 131576.1 2951.6

Jul-20 05-Aug-20 4021.1 129719.6 2968.3

Aug-20 02-Sep-20 4052.1 129929.3 2985.3 Source: Data submitted to DFS, Ministry of Finance, by Public Sector Banks,

Regional Rural Banks and Major Private Sector Banks

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50. During the one-year period early-September 2018 through end-August 2019, there

had been a net issuance of about 465 lakh RuPay debit cards and about 428 lakh

accounts were added under the PMJDY. In contrast, for the corresponding tenure during

early-September 2019 through early-August 2020, we see a subdued issuance of about

65 lakh RuPay debit cards despite about 363 lakh PMJDY accounts added. The

expanding gap between the new PMJDY accounts added and the RuPay debit cards

issued gets clearly reflected in Figure 9. Unless there are other extraneous causes (e.g.

COVID-19, etc.), a possible cause for such a trend could be that banks have deliberately

moved away from RuPay and promote a card scheme which generates more revenue for

them.

2600

2800

3000

3200

3400

3600

3800

4000

02

-Jan

-19

06

-Fe

b-1

9

06

-Mar

-19

03

-Ap

r-1

9

08

-May

-19

05

-Ju

n-1

9

03

-Ju

l-1

9

07

-Au

g-1

9

04

-Se

p-1

9

02

-Oct

-19

06

-No

v-1

9

04

-De

c-1

9

08

-Jan

-20

05

-Fe

b-2

0

04

-Mar

-20

08

-Ap

r-2

0

06

-May

-20

03

-Ju

n-2

0

08

-Ju

l-2

0

05

-Au

g-2

0

02

-Se

p-2

0

Lakh

RuPay debit cards issued under PMJDY accounts

Number of total beneficiaries Number of RuPay debit cards issued to beneficiaries

Pre- zero MDR zero MDR

Expanding Gap

Source: Table 3

Figure 9: RuPay debit card issued against the PMJDY accounts opened

51. We now look at the y-o-y growth of RuPay cards issued and new accounts opened

under the PMJDY. Starting early-September 2019, when the y-o-y growth of RuPay

debit cards issued under the PMJDY was 19%, there has been a significant reduction in

the y-o-y growth of Rupay debit cards. The end-August 2020 y-o-y growth has

drastically reduced to 2%. The consistent decrease in the y-o-y growth since September

2019 is clearly depicted in Figure 10. In contrast, if one looks at the y-o-y growth of

new PMJDY accounts opened, the figures for early-September 2019 and end-August

2020 are 13% and 10%, respectively. Thus, though y-o-y growth of new PMJDY

accounts opened had been relatively consistent, in comparison, the drastic downward y-

o-y growth of RuPay debit cards issued is possibly a zero MDR effect.

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0

2

4

6

8

10

12

14

16

18

20

Jun

-19

Jul-

19

Au

g-1

9

Sep

-19

Oct

-19

No

v-19

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Ap

r-20

May

-20

Jun

-20

Jul-

20

Au

g-2

0

y-o

-y g

row

th p

erce

nta

ge

Decreasing growth of Rupay debit cards issued

y-o-y growth of total beneficiaries

y-o-y growth of RuPay debit cards issued to beneficiaries

zero MDR effect

Source: Table 3 and author’s computation

Figure 10: y-o-y growth of RuPay debit cards issued against PMJDY accounts opened

52. To assess the correct status of RuPay debit cards, we compare the extant of RuPay

debit cards issued (under the PMJDY) against the overall debit cards outstanding. We

consider the period since June 2019. Unlike a steep decline in y-o-y growth of Rupay

debit cards issued under the PMJDY, Figure 11(a) shows that there is a sharp uptick in

y-o-y growth of overall debit cards outstanding that includes mastercard, VISA and

RuPay. Though implicit, inherently this showcases that there is a consistently increasing

y-o-y growth of mastercard/VISA (Figure 11(b)) as against a consistently decelerating

y-o-y growth of RuPay debit cards.10

53. Finally, in Figure 12, we show that the percentage share of RuPay debit cards issued

under the PMJDY among the total debit cards outstanding has been consistently

declining since December 2019. These data and charts showcase the negative impact of

zero MDR on RuPay debit cards issued (at least for those issued under the PMJDY) and

the unintended thrust it provided to mastercard/VISA.

10 Mastercard/VISA debit card data is obtained as the difference between debit cards outstanding and

RuPay debit card issued under PMJDY. It is assumed that the y-o-y growth of non-PMJDY RuPay

debit cards issued is constant, though it is likely that even for non-PMJDY RuPay debit cards there is a

decreasing y-o-y growth. Thus, the increasing y-o-y growth for mastercard/VISA debit cards is likely

to be an underestimate – the increase could possibly be much more.

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-20

-15

-10

-5

0

5

Jun

-201

9

Jul-

201

9

Au

g-2

01

9

Sep

-20

19

Oct

-20

19

No

v-2

019

Dec

-201

9

Jan

-20

20

Feb

-20

20

Mar

-202

0

Ap

r-2

020

May

-20

20

Jun

-202

0

Jul-

202

0

y-o

-y g

row

th p

erce

nta

ge

Increasing growth of overall debit cards

-30

-25

-20

-15

-10

-5

0

5

Jun

-201

9

Jul-

201

9

Au

g-2

019

Sep

-201

9

Oct

-20

19

No

v-2

019

Dec

-201

9

Jan

-20

20

Feb

-20

20

Mar

-202

0

Ap

r-20

20

May

-20

20

Jun

-202

0

Jul-

202

0

y-o

-y g

row

th p

erce

nta

ge

Increasing growth of mastercard/VISA debit cards

(a) y-o-y growth of overall debit cards (b) y-o-y growth of mastercard/VISA debit cards

Source: RBI/DFS and author’s computation

Figure 11: y-o-y growth of (a) overall debit cards, and (b) mastercard/VISA debit cards

34.734.935.135.335.535.735.936.136.336.536.736.937.1

De

c-2

01

9

Jan

-20

20

Feb

-20

20

Ma

r-2

02

0

Ap

r-2

02

0

Ma

y-2

02

0

Jun

-20

20

Jul-

20

20

Pe

rce

nta

ge

Decreasing share of RuPay debit cards

Source: RBI/DFS and author’s computation

Figure 12: Share of RuPay debit cards issued (PMJDY) among the total debit cards outstanding

54. The good intentions of the present discriminatory structure for promoting RuPay

debit cards (with zero MDR) has actually impeded our country’s “Make in India”

initiative, and inadvertently promoted “Made in USA” products. Such a trend needs to

be arrested by appropriate policy intervention, or else RuPay may pay a price of fading

over time. Surely, it may not be practical to mandate issuance of RuPay debit cards

alone (by default), and make it an exception in issuing mastercard/VISA debit cards.

55. As mentioned earlier, the debit card MDR alone has a limited impact in determining

a merchant’s choice for acceptance of a particular card. The high credit card MDR @ 2-

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4% and the high monthly rentals in the range of Rs 200-600 for POS terminals, etc. are

deterrents for many small and medium merchants to embrace debit card payments.

56. With merchants’ preference for debit card acceptance not being quite guided by

debit card MDR alone, for the payments industry, the supply of RuPay debit cards by

the producers (banks) would be impacted due to differentiated administered pricing on

MDR. The administered MDR pricing for RuPay is zero while for mastercard/VISA it is

0.4-0.9%. In presence of such an imbalanced administered pricing, and with merchants’

preference for card acceptance also being guided by considerations other than debit card

MDR, the supply of debit cards by banks gets appositely restricted to products

(mastercard/VISA), which generate higher MDR (interchange) or revenue for them, and

as a result the same is being promoted by the banks. Because of the twin administered

pricing, competition is not resulting in an identical spread or supply of the debit card

products, leading to a welfare loss to the society in form of (i) merchants’ and

consumers’ depleting choice to harness the benefits of zero MDR on RuPay (due to lack

of adequate supply of RuPay debit cards), and (ii) banks no longer having the capacity

to produce RuPay as a means for merchant payments (due to commercial

considerations).

Implicit cost born by the savings and current account depositors

57. As such there is no item-wise scientific costing in banks since most of the

operational expenses relate to bank as a whole. It may not be feasible to calculate

precise costing for a particular type of bank’s account or product. However, the bank’s

broader costs associated with deposit products are covered by the net interest margin11.

58. During 2019-20, the country’s banking sector had an average of about Rs 43.10 lakh

crore parked under savings bank deposits and about Rs 12.54 lakh crore held under

current account deposits (linear projection based on March-end data of 2018 and 2019;

see references [8] and [11]). The then 1-year term deposit rates, on an average, hovered

above the repo rate (the rate at which RBI lends to the banks). Thus, considering the

then prevailing average repo rate of 5.4% per annum (range had been 5.15%-6.00% per

annum), the Rs 43.10 lakh crore parked under savings bank deposits had a potential to

fetch interest to the depositors at least to the tune of Rs 2.14 lakh crore (@ 5.4%) in a

year. This is so since as per RBI12, on an average, 92% of the total amount of savings

bank deposits held by banks always remains with the bank throughout the year13.

11 Net interest margin (NIM) is a measure of the difference between the interest income generated by

banks and the amount of interest paid out to their lenders (e.g., depositors), relative to the amount of

their (interest-earning) assets. 12 Deregulation of Savings Bank Deposit Interest Rate: A Discussion Paper, RBI, April 28, 2011.

http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=2344. 13 For calculating the “time liability” portion of savings deposits, the average of the minimum balances

maintained (in each account) in each of the month during the half year period shall be treated by the

bank as the amount representing the “time liability” portion of the savings bank deposits. See Sl. No.

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However, at 3% per annum average savings bank interest rate, what was received by the

depositors is only Rs 1.19 lakh crore in a year. The prime reason why savings account

holders’ money is not receiving more interest is the banking industry’s choice to retain a

major chunk of the Rs 95,165 crore (= ) balance for cushioning their operational

expenses and profitability.

59. RBI has regulated the interest rate on current account at 0% per annum. A very

conservative estimate of the time component14 of current account deposits is 50%. This

guides us to estimate that the effective Rs 6.27 lakh crore held in the current accounts,

saves banks’ interest liability to the tune of Rs 33,858 crore (= ) (at repo rate of 5.4%).

60. Over time, with the advent of information and communications technology and with

the Core Banking Solution (CBS) in place, the banking system has evolved where the

actual cost to manage current account and savings account deposits for one year vis-à-

vis 1-year term deposits, should not be as large as Rs 1.29 lakh crore (= +). Thus,

given that the banking sector already has in place RBI mandated reasonable service

charges (not out of proportion of actual cost to provide the various services related to

current and savings bank accounts), it appears unjustified to attribute an additional

disproportionately high cost of Rs 1.29 lakh crore to manage the minimal free services

of current and savings bank deposit accounts.

61. It has been perceived for long that it is necessary for banks to provide certain basic

payment transactions for free since banks have differentiated the rate of interest on the

term deposits and the time component of the savings/current deposits. With such large

core balances under the current/savings account portfolio, the differentiated rate of

interest has been the basis of identifying the nature and quantum of ‘basic transactions’

to be provided free by banks. Thus, what is perceived as ‘free’ service of

savings/current accounts by banks is actually paid ex ante by depositors by agreeing to

park their funds in these accounts at a lower return.

57 of the Technical Guidance Note on XBRL Returns – Harmonization of Banking Statistics. RBI,

March 30, 2017. https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=3328 14 One may refer to “Debits to Deposit and Credit Accounts with Scheduled Commercial Banks: 2004-

05”, RBI Bulletin, November 2006.

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V. The way forward for debit cards

62. Though the banks spend money to run their CBS and the consequential payment

system, but that is required for them to remain in business. A significant amount of the

Rs 1.29 lakh crore that the banks generate annually (the implicit price paid by the

savings and current account depositors by sacrificing on interests) is channelized

towards branch-based services, cash handling (cash deposits and withdrawals), and

now, digital payments. Among the free services, to a greater extent, cash and branch

adds to banks’ expenses.

Front-end concerns of debit card usage

63. Till mobile/internet banking caught up, historically we had only cash, cheques and

to some extent branch based NEFT/RTGS for transacting. However, for retail merchant

payments, mastercard/VISA introduced credit and debit cards, as a means of paying

digitally. The only reason why such a card system sustained was the indigenously

developed business model based on MDR. The carrot provided to the merchants was

‘increased sales’ and ‘convenience’. However, since card acceptance came at a

significant price, such a payment product remained limited to organised and relatively

big merchants. In presence of other efficient and cheaper means of receiving payments,

card acceptance is not a judicious recommendation for all merchants. Yes, only if

merchants see gains in accepting credit cards (with MDR @ 2-4%) then only they be

advised to go for setting up card acceptance infrastructure through a bank or a payment

facilitator.

64. For the merchants, credit card based payments is a means to provide an option of

deferred payment to the consumers. This help the merchants to promote their business.

Therefore, in return, merchants have to pay for availing such a facility. The

incorporation of debit cards along with the prevailing credit cards, disturbed the setup.

As a result RBI had to intervene eight years back (September 2012) and introduce

controls on debit card MDR alone.

65. It is acknowledged that for the banks, debit card payments do come at a cost and the

transaction costs would reduce only if volumes pick up. However, a question arises as to

why such debit card volumes should pick up (more so in rural India, despite RBI’s

attempt to infuse funds), given that there are other more simpler, cheaper, efficient and

convenient means to receive payments.

66. RBI has created a Payments Infrastructure Development Fund (PIDF) to encourage

acquirers to deploy POS infrastructure (both physical and digital modes) in tier-3 to tier-

6 centres and north eastern states. RBI says “Over the years, payments ecosystem in the

country has evolved with a wide range of options such as bank accounts, mobile phones,

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cards, etc. To provide further fillip to digitisation of payment systems, it is necessary to

give impetus to acceptance infrastructure across the country, more so in underserved

areas.”. While RBI’s intent is appreciable, it does not comprehensively address the card

acceptance costs of merchants. Though RBI will make an initial contribution of Rs 250

crores to the PIDF covering half the fund, RBI expects that the remaining contribution

to come from card issuing banks and card networks operating in the country. Why

should RBI promote such a move in tier-3 to tier-6 centres, knowing very well that such

a setup would lead to increased costs for merchants while encountering credit cards (and

even debit cards)? RBI should instead consider using such scarce public funds to

promote BHIM-UPI or similar payment products.

67. The country has to invest through its banking system to build volumes in retail

digital payments. Card payment volumes being still low cannot be the ground to charge

more from small and medium merchants – that would be a retrograde step. As a way

out, following the principle of cross-subsidisation, we have to obtain a well calibrated

balance such that large merchants (who are better off than small and medium

merchants) can be used in the MDR play to reasonably cross-subsidise the MDR of

small and medium merchants. Thus, there is a pressing need to re-define the benchmark

set for large merchants (annual turnover of Rs 20 lakh or more), for whom the card

based payment mode attaches more value. The present unreasonable and unthought-

through benchmark set for small and medium merchants (annual turnover of less

than Rs 20 lakh), makes the category near void of merchants, who should be

accepting cards. The true small and medium merchants, who may prefer to accept

cards, did not receive any MDR benefit as they have been categorised under large

merchants. This needs to change.

68. To promote digital payments, the government has identified small and medium

unorganised businesses comprising merchants whose annual turnover is not exceeding

Rs 2 crore. In fact, linking their business in terms of the digital means of payment, the

government under The Finance Act 2017 has put in place the following:

The tax liability under the scheme of presumptive income tax for small and medium tax

payers whose annual turnover is up to Rs 2 crores, only 6% (rather than 8%) of their

annual turnover is counted as presumptive income in respect of turnover which is

received by non-cash means.

69. Keeping the above philosophy in mind, more sooner than later, without modifying

the law under Section 10A of the PSS Act, we should consider removing RuPay debit

cards from the list of prescribed electronic modes inserted under rule 119AA of the

CBDT’s Income-tax Rules, 1962. This move should be subject to RBI and the

government coming together for meaningfully rationalizing the extant caps on debit

card MDR. The prevailing RBI mandated MDR caps, which is based solely on a certain

merchant categorisation, is neither practical nor did it ever get accepted in that form by

the government and the banks. Pricing policy can be ideally based on economic and

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accounting principles. On accounting principle, there is no rigorous and impartial

study on cost of producing such services and the likely loss to banks and system

providers, if any.

Disincentivize cash and promote digital modes as per users’ choice

70. The country’s payment system should make cost of cash more explicit. Banks have

to target in breaking even, few years down the line, by balancing the costs associated

with providing the cash payment system and the digital payment system. Banks have to

devise means to show the users of the payment system that after a certain minimum

threshold, cash is more expensive to use than digital means. This threshold, at least for

urban and semi-urban locations, could be Rs 20,000 (say) of free cash withdrawals per

month. RBI needs to correct its stance on its current mandate promoting excessive

free cash disbursals by banks.

71. While converging to prudent regulations incorporating all good features in a

simplistic manner, the only way forward is that the digital payment space enshrines

parity in transaction cost vis-à-vis cash handling costs. The role of RBI to set

appropriate and more realistic MDR caps is paramount. In order to maintain parity,

RBI on one hand would need to set a revised cap on debit card MDR, and on the

other hand, revise its mandate on excessive free cash withdrawals.

72. The BHIM-UPI is a game changer. In its innovative presence, there is a strong

potential to see debit card usage at merchant locations losing its relevance. The fear of

infection brought in by COVID-19 is a boon for BHIM-UPI (unlike cash and debit card

usage having a potential to transmit the infection). Moreover, for merchants and

consumers alike, so long as there is no artificially created incentive for debit card usage

over BHIM-UPI, the asset-lite and cost effective BHIM-UPI should be promoted over

debit card acceptance.

73. In this regard, any artificially created payment incentives (in form of cashbacks,

rewards points, etc.) that tries to nullify the government’s initiative to provide an

effective alternative of cash in form of zero-MDR based BHIM-UPI should be arrested.

However, any initiative of the banks and system providers that stimulate one to more

away from cash is most welcome, so long as the incentive is uniform across all debit

based digital payment modes. RBI should prohibit discriminatory incentives, based

on a bank’s vested interest, for different digital payment modes on the same front-

end platform. In absence of any artificially created incentive, the preferred choice of

the user, among different digital modes of payment, should be guided solely by price,

convenience, security and simplicity for the user, rather than banks alone. Here, one

cannot view zero MDR for BHIM-UPI as being a discrimination against other payment

modes since BHIM-UPI is a true digital alternative for our day-to-day payments. Just

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like in our day-to-day cash payments there is no concept of MDR, similarly for BHIM-

UPI there is no MDR.

The risk of mix-up of BHIM-UPI QR with Bharat QR

74. We highlight a potential concern. Bharat QR is a P2M mobile payment solution.

This solution is mutually derived by NPCI, mastercard and VISA payment networks.

Once the Bharat QR codes are deployed at merchant locations, consumers can pay using

Bharat QR enabled mobile banking apps. It is similar to a BHIM-UPI QR except that

payments can be additionally made using a debit or a credit card in the background

rather than BHIM-UPI alone.

75. As of July 2020, there were 22.37 lakh Bharat QR codes deployed with a 40.3%

growth over November 2019. Currently, majority of the transactions using Bharat QR

are actually via BHIM-UPI apps. Even for E-com/POS/mobile based dynamic Bharat

QR, we see predominance of the usage of BHIM-UPI apps. Debit/credit cards on

mobile apps are slowly catching up. However, banks and system providers should be

restrained from artificially influencing the choice of a digital payment mode by enticing

through incentives (unless it can be established that the bank is promoting a more

efficient digital payment mode, devoid of any vested interest).

76. Under the present varied fees applied to merchants for BHIM-UPI/debit card/credit

card, such a universal QR code developed for payments has some pitfalls. With the

popularity of BHIM-UPI, a merchant perceives that receiving payments based on QR

code is free. However, the Bharat QR would create ample situations where without a

merchant’s clear knowledge or understanding, a debit card or a credit card (more

expensive) is used during the QR code scan of the Bharat QR. RBI needs to promote

static Bharat QR with caution because of its associated shortcomings. Small and

medium merchants may not see any inherent distinction between BHIM-UPI QR and

Bharat QR, which could turn out to be a costly affair for merchants (vis-à-vis BHIM-

UPI QR). Separating out BHIM-UPI QR embedded in static Bharat QR could mitigate

possible negative sentiments that this may create towards QR codes. However, for the

more organised merchants, generating dynamic QR codes, the universal dynamic Bharat

QR generated on a device may still be acceptable.

Some policy guidance

77. Mastercard/VISA debit cards generating revenue through MDR may be unfair for

RuPay, but this is just a beginning. It is likely that the present approach is only a

temporary measure to test how the card payments market responds. Though it is a fact

that card-based merchant payments have worked well internationally on the principle of

MDR, it is our endeavour to arrive at a rational and non-discriminatory balance, to come

out of the present impasse on MDR. For the present discussion, we restrict ourselves to

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debit cards alone, keeping aside the asset-lite mobile phone based BHIM-UPI, which is

a different class altogether.

78. Acceptance of cards is usually via a combined credit/debit/pre-paid card acceptance

product. The MDR for credit cards is not regulated (reigns as high at 2% to 4%) and

thus is an expensive proposition for merchants. Merchants choose to enable themselves

for card acceptance, knowing well that it would amount to acceptance of credit cards

along with debit cards. As such it may not be advisable for all small and medium

merchants to go for the relatively expensive card-based acceptance when, as an

alternative to cash, there exists an asset-lite mobile payment mode, the BHIM-UPI, that

does not cost the merchants anything under extant laws. Moreover, BHIM-UPI does not

practically need any great effort by banks since merchants on their own (like you and

me) can generate and deploy a BHIM-UPI QR code corresponding to a bank account.

Moving the country away from cash would hinge on having an equivalent, simple,

convenient and secure digital alternative like the BHIM-UPI in this era of mobile

phones. Striving for day-to-day payments through BHIM-UPI, rather than cash, would

achieve our vision for a less-cash economy.

79. In the card payments system, merchant on-boarding is an expensive proposition for

banks. It includes costs that banks have to bear on backend infrastructure and

maintenance, guaranteeing cyber security to mitigate frauds, customer service and

protection, building awareness, etc. Beyond a certain point, someone has to bear the

cost of adding merchants into the card payments ecosystem.

80. To address the distortions present in the card payment ecosystem, we provide some

guidance for policy. The extant law needs a relook so as to allow low and controlled

MDR to be paid uniformly across all card payment schemes. Taking cue from the MDR

caps reasonably set by NPCI for RuPay debit cards prior to 202015, and based on related

inference derived here, we give the following specific suggestions.

For all E-com based payments irrespective of the merchant category, the MDR for

all types of debit and pre-paid cards could be fixed with a cap of 0.6%.

For all POS based payments for merchants having annual turnover in excess of Rs

two crore, the MDR for all types of debit and pre-paid cards could be fixed with a

cap of 0.6%.

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 two crore, the MDR for all types of debit and pre-paid cards, for

transactions up to Rs 2000, could be fixed with a cap of 0.25%, while for

transactions exceeding Rs 2000, the cap could be 0.6%.

15 The MDR pricing structure arrived at by NPCI (effective October 2019) for RuPay debit card had

been 0.4% (0.3% when the transaction is QR-code based) for transactions upto Rs 2000 and 0.6%

(0.5% when the transaction is QR-code based) for transactions exceeding Rs 2000, with a ceiling on

MDR of Rs 150 for any transaction.

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For a prescribed MDR of 0.6%, there could be a ceiling of Rs 150 on the MDR

amount.

The government may consider to reduce the GST for POS terminals.

Any monthly/annual charges imposed by the banks and system providers, for the

card (credit card, debit card and pre-paid card) acceptance POS/PG/mobile app

infrastructure, should be capped by RBI for small and medium merchants having

annual turnover of at most Rs two crore.

For ease of market comparison of no-frill payment products, any fees related to

card acceptance merchant services should be included for disclosure in the RBI

mandated schedule of service charges of banks and system providers.

To maintain parity, alongside the revision of MDR caps, the extant mandates that

currently promote excessive free cash withdrawals should be revised.

Apart from arriving at the number of free ATM cash withdrawals, RBI should

arrive at an object-based threshold for the amount of free cash withdrawal per

month beyond which banks should desirably disincentivize cash withdrawals by

charging reasonably. The threshold could be appropriately set by RBI.

81. Finally, while encouraging digital payments, to mitigate some impediments in the

larger digital payments space beyond debit cards, we highlight some salient issues and

suggestions that needs explicit attention of RBI and the government to dwell on:

(i) The discriminatory approach adopted by the card payment networks to supervise their

own “no surcharge rule”, for credit cards, needs to be addressed by the regulator.

(ii) RBI’s extant rules (effective January 2018) debars costs associated with debit card

acceptance being explicitly passed on to consumers either by merchants or the

banks/system providers. RBI needs to setup a forensic audit, where systemic trails exists

of systematic violations of ‘no surcharging on debit cards’ (especially in the E-com

merchant payments), and ensure that consumers are protected against such defaults.

(iii) RBI should prohibit discriminatory incentives, based on a bank’s vested interest, for

different digital payment modes on the same front-end platform.

(iv) 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.

(v) RBI should consider using the Payments Infrastructure Development Fund (PIDF) to

promote BHIM-UPI or similar payment products.

(vi) RBI and the government should consider promoting extensive radio and television

awareness campaigns for the mobile based BHIM-UPI or similar payment products.

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References (Chronological from oldest)

[1] Das, Ashish and Agarwal, Rakhi (2010). Cashless Payment System in India - A

Roadmap. IIT Bombay Technical Report. May 31, 2010.

http://dspace.library.iitb.ac.in/jspui/handle/10054/1732

[2] Das, Ashish (2016a). Incentivising ATM-cash and cheques over electronic

transactions - A policy gap. IIT Bombay Technical Report. January 26, 2016.

http://dspace.library.iitb.ac.in/jspui/handle/100/18425

[3] Promotion of Payments through Cards and Digital means. Government of India

(Ministry of Finance), February 29, 2016.

http://finmin.nic.in/the_ministry/dept_eco_affairs/currency_coinage/Promo_PaymentsM

eans_Card_Digital.pdf

[4] Concept Paper on Card Acceptance Infrastructure. RBI, March 8, 2016.

https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=840

[5] Das, Ashish (2016b). Promotion of payments through cards and digital means. IIT

Bombay Technical Report. April 24, 2016.

http://dspace.library.iitb.ac.in/jspui/handle/100/18428

[6] Das, Ashish and Das, Praggya (2016). Sanitising Distortions in Digital Payments.

IIT Bombay Technical Report. November 28, 2016.

http://dspace.library.iitb.ac.in/jspui/handle/100/18430

[7] Das, Ashish (2017). Discovering the right MDR for India. IIT Bombay Technical

Report. February 28, 2017.

http://dspace.library.iitb.ac.in/jspui/handle/100/18431

[8] Basic Statistical Returns of Scheduled Commercial Banks (SCBs) in India – Volume

47, March 2018. RBI. January 03, 2019.

https://www.rbi.org.in/Scripts/AnnualPublications.aspx?head=Basic%20Statistical%20

Returns

[9] Das, Ashish (2019). To surcharge or not to surcharge! The plight of small and

medium merchants. IIT Bombay Technical Report. March 3, 2019.

http://dspace.library.iitb.ac.in/jspui/handle/100/25212

[10] Report of the Committee to review the ATM Interchange Fee Structure. Report of

the RBI constituted committee. October 2019.

[11] Basic Statistical Return BSR 2 - Deposits with Scheduled Commercial Banks

(SCBs) – March 2019. RBI, November 15, 2019.

https://www.rbi.org.in/Scripts/AnnualPublications.aspx?head=Basic%20Statistical%20

Return%20BSR%202%20-

%20Deposits%20with%20Scheduled%20Commercial%20Banks%20SCBS

[12] Das, Ashish (2020). Discriminatory approach for RuPay debit cards: Some

suggestions for corrective measures. IIT Bombay Technical Report. January 7, 2020.

http://dspace.library.iitb.ac.in/jspui/handle/100/25214

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[13] BIS Annual Economic Report 2020. Bank for International Settlements, Basel,

Switzerland. June 30, 2020.

https://www.bis.org/publ/arpdf/ar2020e.htm

[14] Report of the Committee on the analysis of QR (Quick Response) Code. RBI. July

22, 2020.

https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1142

[15] Das, Ashish (2020). Deviating from the BHIM-UPI Law. IIT Bombay Technical

Report. August 24, 2020.

http://dspace.library.iitb.ac.in/jspui/handle/100/25215

[16] Database on Indian Economy. RBI's Data Warehouse.

https://dbie.rbi.org.in/DBIE/dbie.rbi?site=publications

[17] NPCI Statistics

https://www.npci.org.in/statistics

[18] Reserve Bank of India Bulletin - September 2020. September 11, 2020.

https://www.rbi.org.in/Scripts/BS_ViewBulletin.aspx?yr=2020&mon=9

[19] Bank-wise ATM/POS/Card Statistics. RBI Data Releases

https://www.rbi.org.in/Scripts/ATMView.aspx

[20] RBI publishes daily data of select payment systems.

https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49901


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