After the RBI capped the merchant discount rate (MDR) on debit cards at differential rates depending on merchant turnover, retailers have started complaining loudly and said they would pass on the charge to consumers. Retailers are being unreasonable. However, that does not mean that the government is doing all that it can to reduce the cost of using plastic or apps for payments. Considering the significant positive externalities that arise from cashless transactions increasing their share in payments, most of which stand to be reaped by the government and the central bank, there is a strong case for subsidising the cost of using cards/apps, dubbed MDR. There is no reason why a consumer has to bear an extra burden on the use of her debit card.
Digital payments create audit trails, enable fast and secure payments for transactions, and lower the risk costs of handling cash. But MDR is way too high in India: 2% in the case of credit cards, compared to 0.2% in China. There is scope to lower MDR. Three parties share MDR: the card/app-issuing bank, from whose account in the payer’s name the payment amount is deducted, the bank that places the card-swipe machine at the store, collects the moneydeducted and pays it into the merchant’s account with the bank, and Visa/MasterCard/RuPay that performs the service of connecting the banks and debiting and crediting the relevant accounts.
Competition from RuPay-enabled transactions should bring down the fees charged by Visa and Master-Card. Volumes should bring down the per-transaction cost for the banks. The government and the RBI can together contribute two-thirds of the cost that remains. The merchant should bear the balance cost: his chances of getting shot for the money he accumulates at the end of the day comes down, apart from the cost of handling cash.
The RBI will save big time on the cost of printing and moving cash around and that can be used to subsidise MDR. The government’s tax collections will go up, thanks to transparency arising from digital payments. A sliver of that can go to subsidise MDR.