Payment Council Of India Says Cut In Debit Card Fee Will Make Business Unviable

A customer enters their pin number while making a chip and pin payment using a Visa Inc. payment card (Photographer: Simon Dawson/Bloomberg)

Pushing back against the Reserve Bank of India's proposal to cut transaction charges on debit cards, the Payment Council of India (PCI) on Thursday said that such a cut would make business unviable for most non-bank firms in the industry.

The council, which acts as an industry lobby body, suggested that charges (known as the MDR or merchant discount rate in industry parlance) should be determined by market forces. Capping them artificially will bring down margins and act as a disincentive for payment firms to go out and acquire merchants, said the council's representatives at a press conference in Mumbai.

If charges are to be capped, they must be distributed equitably among those involved in the payment process, the council has told the RBI in its official response to the proposals.

“The interchange is heavily favoured towards the card issuing banks, thereby not leaving any margins for acquirers and payment processors. We hope that the RBI will ensure that there is an equitable distribution of MDR among all players in the ecosystem,” Vishwas Patel, Vice Chairman of PCI said in a written statement.

In February, the RBI put out a draft proposal suggesting changes to the fee regime on debit cards. The central bank has proposed to bring down the existing MDR from 1 percent of the transaction value to 0.3 percent for small merchants using digital point-of-sale terminals. For physical terminals, the MDR rates are 10 basis points higher at 0.4 percent and 0.95 percent of the transaction value for small and large merchants, respectively. Small merchants will be defined as those who are out of the ambit of the GST i.e. with an annual turnover of less than Rs 20 lakh.

The payments industry is pushing for modifications to these proposals.

Deepak Bhutra, chief executive officer of IndiaTransact, a payment processing firm, said that the industry needs a rate structure which is “sustainable”.

“We as industry players would want a sustainable rate structure which provides enough room for the infrastructure to grow and doesn't require too much government intervention. Globally, wherever MDR is low or capped, someone subsidises it. It can be the banks, customers or the government itself,” said Bhutra.

Other representatives shared that view.

The current pricing is anyway lowest in the world and there shouldn't be more cuts to that. Beyond this, businesses will become unviable as big banks have other sources of revenue such as current account services but this is our only source of income. Reducing price further is not helpful to the government and the RBI's vision.

Srinivasu MN, Director, BillDesk

Also Read: Digital Payments Panel Calls For Tax On Large Cash Transactions

The MDR charged on a debit card transaction is split between the issuing bank, the acquiring entity (bank or non-bank) and network charges levied by Mastercard, Visa and Rupay. The payment industry claims that currently 60 - 85 percent of MDR is taken away by the issuing bank, which leaves little room for others to earn revenue.

The PCI has asked the RBI to cap the share between issuing and acquiring entities at 50 percent each. The means that banks who issue cards don't get more than 50 percent of the total transaction charge. Out of this, banks on both the issuing and the acquiring side have to pay a network fee to firms like Visa and Mastercard while companies deploying PoS terminals earn from the acquiring fee.

PCI emphasized the role played by acquirers in strengthening the card acceptance infrastructure.

The acquirers have been investing in giving small merchants access to digital payments. These non-banking payment entities take the responsibility of not only providing the infrastructure but also managing merchant's evaluation, servicing, risk management and education. MDR is the only source of revenue for these payment companies.

Payments Council Of India Statement (March 16)

The council is also not in favor of differential charges being imposed on merchants based on their size. This could prove to be an operational nightmare, said Srinvasu MN, Director of BillDesk.

“MDR is not the hurdle in the growth of digital payments ecosystem. It will be an operational nightmare to determine the size of businesses to fix their MDR rate. This will add additional steps to the process which all adds to our cost. Keeping it simple is the best way to keep costs lower,” he said.