Are RBI's efforts to reduce MDR charges on debit card transactions enough?

The Reserve Bank of India (RBI) has issued a draft circular aiming at rationalising Merchant Discount Rate (MDR) on debit card transactions. 

Analysts and industry experts believe that the proposed rules only bring down MDR for a few categories and fails to address the larger issues of opacity and bundling of charges. Jefferies said, "By categorising the merchants under so many categories, RBI is unnecessarily making things complicated and the regulation cumbersome. This can be even more complicated in the case of some merchants providing a bunch products/services with products/services falling under different categories."

The draft circular, issued on February 15, 2017, said that small merchants and special category of merchants may not pay more than 0.40% of the transaction value towards physical POS (Point of Sale) infrastructure and 0.30% towards digital POS. 

It further said that all other categories of merchants (apart from Government) may not pay more than 0.95% and 0.85% of transaction value for physical and digital POS. 

For government transactions, RBI said that a flat fee of Rs 5 per Re 1 to Rs 1000, Rs 10 for transactions between Rs 1001 to Rs 2000. "MDR not exceeding 0.50% for transaction value above Rs 2001 with cap of Rs 250 per transaction," RBI said. 

Currently, MDR charges on debit card transactions stand at below 0.75% for transactions less than Rs 2000 and less than 1% for transactions above Rs 2000. 

Nilanjan Karfa, Avinash Singh of Jefferies, in a note on February 16, 2017 said, "The draft circular fails short of our expectations and does not do much beyond reducing slightly the MDR for government and a few other select categories of merchants. We are not sure this will propel merchants to adopt POS machine, and likewise don't see it as a big threat to banks' fee income from lower interchange."

They said, "Our initial assessment of this draft circular suggests that this proposed framework is far from desirable and an immature approach to address the larger issues related to the card payment systems."