CARDS & PAYMENTS | Staff Reporter, India

Is the RBI's move to rationalise Merchant Discount Rate a big threat to banks?

Analysts say the proposed framework is "an immature approach".

The RBI issued a draft circular on rationalising Merchant Discount Rate (MDR) on debit card transactions. However, the draft circular fails short of Jefferies's expectations and does not do much beyond reducing slightly the MDR for government and a few other select categories of merchants.

"We are not sure this will propel merchants to adopt POS machine, and likewise don't see it as a big threat to banks' fee income from lower interchange."

Here's more from BMI Research:

RBI Issues draft circular on MDR rationalisation. The Reserve Bank of India (RBI) has issued yesterday the draft circular on rationalisation of Merchant Discount Rate (MDR) on Debit Card transactions. This circular gains its significance in the context of government’s push towards digital/cashless transactions post demonetisation. 

Our initial assessment of this draft circular suggests that this proposed framework is far from desirable and an immature approach to address the larger issues related to the card payment systems.

Hardly any radical changes, the circular lack vision. In its essence, this circular tries to bucket merchants into four broad categories and mode of transaction into two categories (physical and online/web PoS).

All this proposed rationalisation does is reduce the MDR for some categories of merchants (Government, small and special categories). Beyond this, the framework has not addressed the larger issues of opacity and bundling of charges.

Making things more complicated. By categorizing the merchants under so many categories, RBI is unnecessarily making things complicated and the regulation cumbersome. This can be even more complicated in the case of some merchants providing a bunch products/services with products/services falling under different categories.

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