The Reserve Bank of India (RBI) has proposed rationalisation of Merchant Discount Rate (MDR) on debit cards and the formation of Acceptance Development Funds (ADFs) to encourage wider deployment of card acceptance infrastructure.
“The high cost of acquisition and poor revenue from the acquisition business is one of the most significant reasons for low growth in acceptance infrastructure,” the RBI said in a concept paper on card acceptance infrastructure. The major source of revenue in the card business is the merchant discount rate. The paper outlines strategic options for addressing the issue of both expansion of card acceptance infrastructure as well as rationalisation of MDR.
The RBI also said there is a need to rationalise MDR on credit card transactions as well. Currently, different banks are charging different rates on credit card use by customers. “Regulatory intervention in the form of rationalisation of merchant discount rate (MDR) a few years earlier has also not had the desired catalytic effect. Growth in card acceptance infrastructure at merchant locations has been slow,” the RBI said. The RBI paper has proposed four options for rationalising MDR. This includes the option of levying a flat or fixed fee as MDR for transactions above a certain threshold value. For transactions below this value, MDR at ad-valorem basis may continue, it proposed.
At present, the RBI has capped charges at 0.75 per cent of the transaction amount for value up to Rs 2,000 and one per cent for transaction amount for value above Rs 2,000.
Another option is to rationalise MDR in select categories in tier III to VI locations with the objective of ensuring wider deployment of POS terminals in specific locations and also minimising the revenue impact on the industry. Another option is to have a differentiated MDR framework for some merchant categories across all locations, the RBI said.
On the formation of ADFs, the RBI paper said ADFs are market-driven initiatives (sometimes with regulatory recognition) where different stakeholders in the card payment value chain come together to set up a programme to encourage wider deployment of card acceptance infrastructure. “Typically, these ADFs are generally funded by card issuers to build a corpus by diverting a percentage of their transaction revenue into the fund which is then invested in structured initiatives to expand acceptance infrastructure in the country,” it said.
ADFs are usually managed by third parties who establish the framework for use of funds which include subsidies for installation of terminals, development of new technologies, segments and geographies, marketing and education to increase awareness.