After the demonetization move, the government and the RBI instructed the banks to lower the Merchant Discount Rate till March 31st, 2017. The present MDR charge is 0.25% on transaction up to 1000 and 0.5% on transaction up to 2000. After March 31st, the MDR rate will be 0.75% on transaction up to 2000 and 1% on transaction above 2000. Many of the merchants find trouble in paying this rate to the banks.
How MDR Rate Impacted Merchants?
Merchant Discount Rate is commission charged on digital transactions including transactions through Debit and Credit cards. For every transaction, the merchants had to pay a proportionate amount of commission to the banks. In order to encourage digital payment, the government along with the RBI directed the commercial banks to reduce the MDR rate till March 31st.
Though this initiative gave some relief to the merchants and customers but the commercial banks had to suffer the loss due to this move. Many merchants found it hard to adopt digital payments due to MDR rate which they had to pay. It would be interesting to see what the government and RBI do in order to encourage digital transactions without disappointing the merchants and commercial banks.
Possible Scenario after March 31st, 2017
The Reserve Bank of India in its latest statement left it on the commercial banks to decide whether they want to charge on transactions or not. The government said that they have requested the banks to extend the discount period to further extent. It would be interesting to see how the banks will manage the loss due to MDR waiver. From the perspective of customers, it would be better that the banks should extend the waiver for more time.
It would also be encouraging for new merchants to use digital methods for payments if the waiver is extended. The charge gets lower with the increase in number of transactions. The decision lies in the hands of commercial banks and the government. As per the initiative of Prime Minister Narendra Modi, the government is most likely to ask the banks to extend the waiver in order to encourage digital payment which is a prestigious initiative of the government amidst all criticism.