Following extensive discussions last week, the National Payments Corporation of India (NPCI) and various banks have finally agreed on a proposal to charge 2 per cent MDR for UPI-RuPay credit cards, barring transactions originating from small merchant establishments with turnover up to Rs 20 lakh.
The NPCI and banks have reached a consensus to charge 2 per cent MDR or merchant discount rate for RuPay credit cards on UPI network, of which 1.5 per cent will go towards the card issuing bank, and 0.5 per cent, will be shared with RuPay network and the acquiring entity.
After an RBI conference last month, Reserve Bank Deputy Governor T. Rabi Sankar said, “The basic objective of linking credit cards to UPI is to provide a customer (with) a wider choice of payments. Currently, UPI is linked through debit cards to savings accounts or current accounts.”
Regarding pricing, the RBI Deputy Governor said that banks will have to do the pricing. “The system entities will have to do. At this point, we will introduce the arrangement, and pricing we will see how it goes,” PTI reported quoting him as saying.
What is MDR?
Every payment on a network like VISA, Mastercard, RuPay, etc., entails the involvement of different intermediaries. So, to compensate these intermediaries and the card network, a fee is charged by the card issuing bank and then distributed accordingly. The RBI had revised the MDR charging mechanism in 2017 and published a detailed FAQ regarding the same.
For smaller merchants, whose turnover is up to Rs 20 lakh, banks cannot charge more than 0.4 per cent for transaction up to a maximum of Rs 200 per for both physical point of sale (POS) and online transactions. In the case of QR code-based payments, banks can charge 0.3 per cent up to a maximum Rs 200 per transaction.
For other merchants, the RBI said that banks can charge up to 0.9 per cent MDR for transaction up to a maximum of Rs 1000 for POS and online transactions and 0.8 per cent MDR for QR code-based payments up to a maximum of Rs 1000 per transaction.
"MDR is also called TDR or Transaction Discount Rate. The MDR fee thus charged is shared between the Point of Sale (POS) terminal provider, the bank that processes the POS transaction, the network provider (VISA, MasterCard, Rupay, etc.), and the bank which has issued the card," said Balaji Jagannathan, Co-founder, Paycorp.io, a payment processing company.
What Is Being Proposed?
NPCI, in its discussion with several banks, has put out its thoughts on the table. Business Standard reported citing the NPCI that no MDR will be charged for transactions in the range Rs 2000 to Rs 5000 for merchants with an annual turnover of up to Rs 20 lakh, and no limit on the number of daily transactions.
Regarding compensation to banks and facilitation of these payments, the NPCI said that losses due to no MDR charges for these specified merchants will be made up for by annual charges on credit cards and earnings on rollover credit card balances after the interest-free credit card dues window is over, which is 45 days for RuPay credit cards.
"We welcome the move of NPCI rolling out a framework announcing a charge of 2 per cent on credit-card transactions via RuPay-UPI since unlike in the case of debit cards, MDR is important for credit card businesses owing to an interest-free credit period of 45 days, and an unsecured transaction. This MDR will ensure margins for the issuing banks and the acquiring entities, and will encourage them to accelerate the adoption of UPI among consumers," said Dilip Modi, founder, Spice money, a rural India fintech company.
Why is MDR Important?
In the Union Budget 2019, it was announced that there should be no MDR for UPI and RuPay debit card transactions up to Rs 2000. To compensate banks for the loss of MDR, the Union Cabinet in December, 2021, announced a Rs 1300 crore relief package.
Minister of Electronics and Information Technology Ashwini Vaishnaw said the central government will reimburse transaction charges levied on digital payments made by persons to the merchant (P2M) and will also pay a percentage of the value of the person to merchant (P2M) transactions done through RuPay debit cards and low-value UPI payments.
"Network providers such as VISA, MasterCard, and Rupay provide uninterrupted payment processing services across countries. They have created a vast technology network spanning most banks in the world. All of this infrastructure is essential to handle the high and growing volume of payment transactions that we experience. Network providers, therefore, require this fee to sustain and grow this infrastructure," added Jagannathan.
This move helped banks recover some costs behind processing RuPay debit card payments and boosted the overall digital payments ecosystem. Click here to read more about how UPI Transactions Cross Rs 80 Trillion in FY22.
Unlike debit card transactions, credit cards transactions are mostly unsecured, with an interest free repayment period. For RuPay credit cards, the interest free repayment period is 45 days. Hence, banks have to provide the money as and when the credit card user demands. All of this can add up to costs. Thus, MDR is important for credit card transactions.
"It is important to note here that a debit card is simply another means to access the customer's pre-funded bank account. Whereas a credit card as we all know is a credit line made available by the bank which the consumer accesses through the card. both the issuing and acquiring businesses of the banks require a fee to operate their debit and credit card business. So it is quite easy to see why MDR is important for a digital payment ecosystem to sustain and thrive," added Jagannathan.
Furthermore, citing a senior official, Business Standard reported that nearly 55 per cent of all credit card transactions occurred online, 40 per cent in offline stores, and about 5 per cent in merchant establishments with a turnover of up to Rs 20 lakh.
Hence, zero MDR for merchants with a turnover up to Rs 20 lakh can be offset by the annual charges on credit cards that issuers charge and from earnings on rollover credit balances after the interest free window close.