RBI to lower Merchant Discount Rate for digital transactions

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During its bi-monthly policy review meet for December, the Reserve Bank of India (RBI) announced that it would rationalise the charges for digital transactions. In its policy review statement, RBI said that rationalising the transaction charges will boost digital payment transactions especially at a time when these transactions are increasing all over the country.

digital transactions

The statement by RBI mentioned that credit/debit card transactions at ‘point of sales’ have witnessed a massive growth in the country following the government’s initiative on demonetisation. In order to aid in further growth, RBI would rationalise the charges and create a framework for Merchant Discount Rate (MDR) applicable for digital transactions.

MDR refers to the charges set by banks for merchants to provide credit and debit card transaction services. Banks provide the ‘Point of Sale’ machines to merchants and help them get digital payments in their accounts. In return, banks charge a fixed rate on each transaction from the merchant.

For transactions up to Rs.1,000, MDR is currently capped at 0.25%. For transactions between Rs.1,000 and Rs.2,000, MDR is charged at 0.5%. Transactions above Rs.2,000 will attract MDR of 1%.

Under this new framework for digital transaction charges, RBI will create a differentiated MDR for asset-light acceptance infrastructure. Moreover, the framework will also set a cap on the absolute MDR amount per transaction. The framework is yet to be developed, and it will be based on the category of merchants in the country.

With the revision in MDR, RBI is aiming to increase credit card transactions all over the country and help businesses sustain their operations. The government is already pushing for a reduction in MDR charges in order to keep up with its policy of cashless economic transactions. High MDR charges is often blamed to be the reason why many merchants still hesitate to accept digital transactions in their outlets.

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