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Merchant Discount Rate (MDR): Latest Controversy & Government’s Response

MDR is a necessary evil which we must continue to live with. The ongoing spat between banks and fuel retailers highlights some of the transactional issues the government needs to address as it promotes digital payments.
By IT' Mains Articles Team
January 10, 2017

 

Topics: “Economy Concept”
GS (M) Paper-2: “Government policies and interventions for development in various sectors and issues arising out of their design and implementation.”

Merchant Discount Rate (MDR): Latest Controversy & Government’s Response

Why it is in news?

Recently, the All India Petroleum Dealers Association announced that petrol pumps across the country would not accept credit or debit cards in protest against the Merchant Discount Rate, the burden of which was placed entirely on the dealers.

The association later deferred this move till January 13 after the transaction fees were waived till that date.

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What is Merchant Discount Rate?

When a merchant signs up with a bank to receive credit card payments, he agrees to pay a fee to the banks for the same. This is referred to as merchant discount rate (MDR).

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Current rate:

  • Globally, this fee is generally 2.5% with the average charge being 1% per transaction.
  • The fee is shared by the banks and the credit card organisations like Visa or Mastercard.
  • For debit card transactions, RBI has capped the MDR at 0.75% for transactions up to Rs 2,000 and at 1% for transactions above Rs 2,000. However, there is no similar cap on MDR for credit card transactions.

What’s the current issue? and Why the dealers are against this surcharge?

  • After demonetization move, to make things easier for customers and to promote non-cash transactions, the government announced a 0.75% discount on card purchases of fuel. It also waived the MDR on such purchases for 50 days. With that promotional period elapsing, banks said they would reinstate the charge.
  • Petrol pumps claim that their margins are so thin that they can’t pay for the transaction.
  • Indeed, there is also some confusion on who will bear the cost of the 0.75% discount announced by the government.
  • Small merchants, however, sometimes are not able to realise/perceive the benefits, and consider MDR charges a drain on their profitability.

Wrong usages of MDR:

Over-charging MDR:

Sometimes, merchants charging even more than the MDR, thereby gaining extra money than the price or the bill presented to the client. It can be reasonably argued that this is defrauding the customer and is illegal and should be prohibited.

Customer pays more without being known:

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In the case of petrol pump outlets, at the time of payment, the customer pays only the cost of the fuel and no additional fees are added to the transaction. However, on receiving the statement of the card, it can be seen that the amount charged for the transaction at the petrol pump is more than the amount swiped for. The additional amount is the surcharge or MDR which is added to the total transaction value and is charged to the customer. This is unfortunate as the customer does not know that he will be paying the extra charge.

Possible solutions:

  • Government can either cap MDR or have differentiated MDR for different sectors of merchants, for example — utility bill payments (electricity, water, gas, telephone), municipal taxes, primary hospitals and health centres, would have no or negligible MDR.
  • To sustain the issuance of 188.6 million (and counting) Rupay cards during Pradhan Mantri Jan Dhan Yojana (PMJDY), RBI and the credit and debit card institutions will need to work together to ensure MDR is charged reasonably.

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  • Earlier the card issuing companies used to charge a lower MDR for government utility bills, railway reservations and for payment in Life Insurance Corp. of India. In case of petrol pumps the MDR was nil and banks used to levy 2.5% from customers as surcharge.
  • Even before demonetization move, most banks were not charging MDR for fuel purchases. This is usually negotiated at the time the card machine is installed at the petrol station or any other merchant outlet.

How the central government handles the MDR issue?

  • The Government of India is taking steps to bear MDR like other merchants. The Ministry of Finance has issued a direction to all government organizations in this regard.
  • The Petroleum Minister said that neither the consumer nor the dealers would bear the MDR for fuel refills even after January 13.
  • Since demonetization move, public sector banks have been advised by the Centre to charge a maximum of Rs. 100 a month as PoS device rentals from small merchants, and the move has benefited 6.5 lakh of the 15 lakh PoS devices.
  • Public sector oil marketers were asked to offer a 0.75 per cent discount to customers using non-cash means to tank up.
  • The Railways, public sector insurers and others have been asked to offer discounts or charge lower rates for cashless transactions.

How this issue is important for cashless drive of the government?

  • Petroleum outlets are particularly important for a cash-lite economy push as they handle nearly Rs. 2 lakh crore of cash a year.

Conclusion:

The ongoing spat between banks and fuel retailers highlights some of the transactional issues the government needs to address as it promotes digital payments.

MDR is a necessary evil which we must continue to live with. Regulating MDR and keeping all stakeholders happy is a huge challenge for the RBI. To achieve the goal of financial inclusion, the role of credit and debit card institutions is extremely important.

[Ref: The Hindu, LiveMint, DC]

 

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