Given how wafer-thin retailer margins are—often 3-4%—it is not surprising retailers are up in arms against the central bank’s latest guidelines on merchant discount rates, or commissions, on debit card transactions. At a maximum 0.25% for transactions up to Rs 1,000, and 0.5% for transactions between Rs 1,000 and Rs 2,000, even the earlier rates were too high—roughly 10% of a retailer’s margin—for low-value transactions. But now, as per the new RBI guidelines, merchant commissions have risen to a maximum of 0.4% if the merchant has an annual turnover of less than Rs 20 lakh and 0.9% if the turnover exceeds Rs 20 lakh. It is true there has been a steep jump in debit card purchases—from Rs 11,485 crore in April 2015 to Rs 14,803 crore in April 2016, Rs 58,031 crore at the height of demonetisation in December 2016 and still a healthy Rs 36,629 crore in September 2017. But while debit card usage has risen, it is unlikely there has been much of a pick up at smaller retailers—keep in mind that while debit card usage at merchants was `36,629 crore in September 2017, the same debit cards were used to withdraw Rs 241,954 crore from ATMs.
While RBI allows a 10 bps reduction in these rates if QR codes are used instead and the payment is made using a mobile phone, even this is too high for small payments. The best way to make this take off is to use QRs generated by the UPI system in place of those generated by debit cards like Master, Visa or RuPay. In this case, once a merchant has linked his bank account to an Aadhaar number, he can simply print out the UPI QR code and put a copy of this in his shop—those making purchases can then scan this with their phones and make a direct payment from their bank accounts using the UPI mechanism. While the rates for this are negotiated between banks and clients, given the absence of hardware costs like debit card machines, the cost of this for the merchant can be minuscule since the transactions are all electronic and there are no overhead costs. To the extent there are on-boarding costs of convincing enough merchants to link their bank accounts to UPI, this is a cost the central government must bear as part of the process to promote digitisation—indeed, as this newspaper has argued before, the government’s plan to promote UPI/BHIM has been lacklustre and unimaginative. With both demonetisation and GST making the use of cash to avoid taxes that much more difficult, the good news is, promoting digital payments has got a lot easier—but it will spread much faster if this is done using UPI and if UPI rates are kept to a minimum, as they can given the costs involved.