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
Merchant transactions through debit cards
Merchant transactions through debit cards
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 1
Merchant transactions through debit cards
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.
Percentage growth of debit cards - RuPay vs. mastercard/VISA
18 4 16 0 14 -4 12 -8 10 -12 8 -16 -20
6 y growthmastercard/VISA
-
o
- y
y y growthPMJDY accounts/RuPay 4 -24
-
o -
y 2 -28
Jul-2019 Jul-2020
Jan-2020
Jun-2019 Jun-2020
Oct-2019
Feb-2020 Apr-2020
Sep-2019
Dec-2019
Aug-2020 Aug-2019
Nov-2019
Mar-2020 May-2020
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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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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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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BHIM-UPI Volume - Daily, Average and Month-end total 7
6.5
180 Proj. 6
5.5 162
5 150 Crore
4.5 134
4
3.5
3 Jun-20 Jul-20 Aug-20 Sep-20 Jun-Sep'20 Mean (Jun) Mean (Jul) Mean (Aug) Mean (Sep)
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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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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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. 9
Merchant transactions through debit cards
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). 10
Merchant transactions through debit cards
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. 15
Merchant transactions through debit cards
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. 16
Merchant transactions through debit cards
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.
ATM withdrawals Volume ATM withdrawals Value
Pre-demo Wash-out period Post-demo Pre-demo Wash-out period Post-demo 9000 8500 280000 8000 7500 230000
7000 Lakh
Rs Crore 180000 6500 6000 130000 5500 6-month Mov. Avg. 6-month Mov. Avg.
5000 80000
Jun-2015
Jun-2016
Jun-2017
Jun-2018
Jun-2019
Oct-2015
Oct-2016
Oct-2017
Oct-2018
Oct-2019
Apr-2015
Feb-2016
Apr-2016
Feb-2017
Apr-2017
Feb-2018
Apr-2018
Feb-2019
Apr-2019
Jun-2015
Jun-2016
Jun-2017
Jun-2018
Jun-2019
Dec-2015
Dec-2016
Dec-2017
Dec-2018
Oct-2015
Oct-2016
Oct-2017
Oct-2018
Oct-2019
Apr-2015
Feb-2016
Apr-2016
Feb-2017
Apr-2017
Feb-2018
Apr-2018
Feb-2019
Apr-2019
Aug-2015
Aug-2016
Aug-2017
Aug-2018
Aug-2019
Dec-2015
Dec-2016
Dec-2017
Dec-2018
Aug-2015
Aug-2016
Aug-2017
Aug-2018 Aug-2019
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.
19
Merchant transactions through debit cards
Cash withdrawal at ATM 7000 350000 6000 300000 5000 4000 250000 3000 200000
2000 Volume (Lakh) 150000 (Rs Crore)Value 1000
0 100000
Jul-20
Jan-20
Jun-20
Feb-20
Apr-20
Dec-19
Nov-19
Mar-20 May-20 Volume Value
Source: RBI Figure 2: Cash withdrawal at ATM using debit cards
ATM cash withdrawal Volume ATM cash withdrawal Value 4500 160000 4000 140000 3500 120000 3000 100000 2500 80000 Lalh 2000
Rs CroreRs 60000 1500 1000 40000 500 20000
0 0
Jul'19
Jul'20
Jul'19
Jul'20
Jan'18
Jan'19
Jan'20
Jan'18
Jan'19
Jan'20
Jun'19
Jun'20
Jun'19
Jun'20
Oct'18
Oct'19
Oct'18
Oct'19
Feb'18
Apr'18
Feb'19
Apr'19
Feb'20
Apr'20
Feb'18
Apr'18
Feb'19
Apr'19
Feb'20
Apr'20
Sep'18
Sep'19
Sep'18
Sep'19
Dec'18
Dec'19
Dec'18
Dec'19
July'18
July'18
Aug'18
Aug'19
Aug'20
Aug'18
Aug'19
Aug'20
Nov'18
Nov'19
Nov'18
Nov'19
Mar'18
Mar'19
Mar'20
Mar'18
Mar'19
Mar'20
May'18
May'19
May'20
May'18
May'19
May'20
June'18 June'18
NFS Inter Bank ATM Cash Withdrawal 12-month Mov. Avg. 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
20
Merchant transactions through debit cards
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.
Merchant transactions Volume Merchant transactions Value Pre-demo Wash-out period Post-demo Pre-demo Wash-out period Post-demo 4700 80000 4200 70000 3700 60000 3200
2700 50000 Lakh
2200 Rs Crore 40000
1700 30000 1200 6-month Mov. Avg. 20000 6-month Mov. Avg. 700
10000
Jun-2015 Jun-2016 Jun-2017 Jun-2018 Jun-2019
Oct-2019 Oct-2015 Oct-2016 Oct-2017 Oct-2018
Apr-2015 Apr-2016 Apr-2017 Apr-2018 Apr-2019
Feb-2016 Feb-2017 Feb-2018 Feb-2019
Dec-2015 Dec-2016 Dec-2017 Dec-2018
Aug-2017 Aug-2018 Aug-2015 Aug-2016 Aug-2019
Jun-2015
Jun-2016
Jun-2017
Jun-2018
Jun-2019
Oct-2015
Oct-2016
Oct-2017
Oct-2018
Oct-2019
Apr-2015
Apr-2016
Apr-2017
Apr-2018
Apr-2019
Feb-2016
Feb-2017
Feb-2018
Feb-2019
Dec-2015
Dec-2016
Dec-2017
Dec-2018
Aug-2015
Aug-2016
Aug-2017 Aug-2018 Aug-2019 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
21
Merchant transactions through debit cards
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.
Merchant transactions Value
45000
39740
38907 37007 37500 36258
30000 27238
25821
25788
24018
23246
22258
21582
21467
20582
20408 18814
22500 18807 Rs Crore Rs
15000 13993 9005 7500
0 Nov.19 Dec.19 Jan.20 Feb.20 Mar.20 Apr.20 May.20 Jun.20 Jul.20 POS based E-com based
Source: RBI Figure 5: Share of POS and E-com merchant transactions using debit cards (value)
Share of debit card transactions (Value) in POS and E-com 70 64 64 63 63 61 60 57 55 52 50 50 48 50 45 43 39 40 36 36 37 37
30 Percentage
20
10
0 Nov.19 Dec.19 Jan.20 Feb.20 Mar.20 Apr.20 May.20 Jun.20 Jul.20
POS based E-com based
Source: RBI Figure 6: Percentage share of POS and E-com transactions (value)
22
Merchant transactions through debit cards
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.
RuPay and mastercard/VISA debit card volume share RuPay and mastercard/VISA debit card value share 80 80 70 70 60 60
50 50 Percentage 40 Percentage 40 30 30
20 20
Jul-2019
Jul-2020
Jul-2019
Jul-2020
Jan-2020
Jan-2020
Jun-2019
Jun-2020
Jun-2019
Jun-2020
Oct-2019
Oct-2019
Apr-2019
Feb-2020
Apr-2020
Apr-2019
Feb-2020
Apr-2020
Sep-2019
Sep-2019
Dec-2019
Dec-2019
Aug-2019
Aug-2019
Nov-2019
Nov-2019
Mar-2020
Mar-2020
May-2019
May-2020
May-2019 May-2020
RuPay mastercard/VISA 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.
23
Merchant transactions through debit cards
POS based credit and debit card transactions Value
40000
39740 38907
30000 37007 36258
20000 27238
25821
25788 Rs Crore Rs
10000 18814
9005
31730
35157
35124
33446
26656
8052
13470
19293 20107
0
Jul-2020
Jan-2020
Jun-2020
Apr-2020
Feb-2020
Dec-2019
Nov-2019
Mar-2020 May-2020
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.
24
Merchant transactions through debit cards
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. 25
Merchant transactions through debit cards
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 Sub Rs 2000 MDR MDR Debit RuPay mastercard/ Value transactions Revenue Revenue cards cards VISA cards (Rs Crore) @65% of (3) @0.4% of (4) @0.9% of (4) (1) (2) (3) (4) (5) (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 Projection → 1030 2317 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 26
Merchant transactions through debit cards
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
27
Merchant transactions through debit cards
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
Number of RuPay Number of total Deposits in debit cards issued Month-end Date beneficiaries Accounts to beneficiaries (Lakh) (Rs Crore) (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
28
Merchant transactions through debit cards
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.
RuPay debit cards issued under PMJDY accounts Pre- zero MDR zero MDR 4000 3800 3600 Expanding Gap 3400 Lakh 3200 3000 2800
2600
03-Jul-19
08-Jul-20
02-Jan-19
08-Jan-20
05-Jun-19
03-Jun-20
02-Oct-19
06-Feb-19
03-Apr-19
05-Feb-20
08-Apr-20
04-Sep-19
02-Sep-20
04-Dec-19
07-Aug-19
05-Aug-20
06-Nov-19
06-Mar-19
04-Mar-20
08-May-19 06-May-20
Number of total beneficiaries Number of RuPay debit cards issued to beneficiaries
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.
29
Merchant transactions through debit cards
Decreasing growth of Rupay debit cards issued 20 18 16 14 12 10 8
6
y growth percentage growth y -
o 4 - zero MDR effect y 2
0
Jul-19
Jul-20
Jan-20
Jun-19
Jun-20
Oct-19
Apr-20
Feb-20
Sep-19
Dec-19
Aug-19
Aug-20
Nov-19
Mar-20 May-20
y-o-y growth of total beneficiaries y-o-y growth of RuPay debit cards issued to beneficiaries
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. 30
Merchant transactions through debit cards
Increasing growth of overall debit cards Increasing growth of mastercard/VISA debit cards 5 5
0 0 -5 -5 -10
-10 -15
y growth percentage growth y
y growth percentage growth y -
- -20
o
o -
-15 - y y -25
-20 -30
Jul-2019
Jul-2020
Jul-2019
Jul-2020
Jan-2020
Jan-2020
Jun-2019
Jun-2020
Jun-2019
Jun-2020
Oct-2019
Oct-2019
Apr-2020
Feb-2020
Apr-2020
Feb-2020
Sep-2019
Sep-2019
Dec-2019
Dec-2019
Aug-2019
Aug-2019
Nov-2019
Nov-2019
Mar-2020
Mar-2020 May-2020 May-2020 (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
Decreasing share of RuPay debit cards 37.1 36.9 36.7 36.5 36.3 36.1 35.9 35.7 Percentage 35.5 35.3 35.1 34.9
34.7
Jul-2020
Jan-2020
Jun-2020
Feb-2020
Apr-2020
Dec-2019 Mar-2020 May-2020 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-
31
Merchant transactions through debit cards
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. 32
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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. 33
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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. 39
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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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