The Indian government has been making consistent efforts to create a less-cash economy through a slew of digital payment initiatives in the country. To further provide impetus to this ongoing digital transformation, the central government has made a major announcement,  which will have a deep impact on the banking sector in the country. One such measure is waiving off the MDR (merchant discount rate).

Towards greater digitization

The central government has announced the removal of MDR for all digital payments. The MDR refers to the fees that the merchants must pay to the banks in order to avail of their online payment facilities/infrastructure. Now, with the new rule coming into force, merchants who have an annual turnover of above Rs 50 crores will not pay the MDR to the banks and pass on the benefits to the customers. The scheme will not be applicable for credit cards and MDR will continue to be levied for payments made using credit cards. Also, the scheme will initially be rolled out with UPI, BHIM, Aadhaar Pay, and certain debit cards.

Similarly, the current applicable charges for RTGS and NEFT will also be removed by the Reserve Bank of India to provide further impetus to digital transactions. The notification to this effect is likely to be announced soon. Currently there are different RTGS and NEFT rates applicable for specified transaction amounts. These rates vary from public sector banks to private banks.

Banks to absorb the losses

However, while the central government’s move to waive off MDR will encourage more merchants to adopt digital payments and benefit the large retail chains and end customers, the banks will be left with a dent in their earnings as now they will have to absorb these costs. Banks will bear additional revenue losses as a result of losing out on RTGS/NEFT charges.

The loss in revenue will leave the banks with little incentive to continue building an infrastructure that supports such services and partner merchants. As a result, banks will look out for alternative revenue streams that can help plug the losses. This has prompted the Payments Council of India – a consortium of digital payments players in India – to issue a statement proposing that the government must bear the MDR costs so that the banks can focus on strengthening the infrastructure and continue supporting the merchants.

The article has been written by Neetu Katyal, Content and Marketing Consultant

She can be reached on LinkedIn.