In a circular issued by RBI on 28 June 2012, the central bank directed the commercial banks to cap the debit card merchant discount rates (MDR) at 0.75% for all transactions upto Rs 2000 and at 1% for all transactions above Rs 2000. On 28th May 2012 — that is exactly one month before this directive came — in a post titled Containing Black Money: Promoting Debit Card Usage Holds the Key, in this blog, I had argued that increased usage of debit card could go a long way in reducing the black economy.
This is what I wrote
RBI can well go proactive on promoting use of debit cards, as they provide a risk free way for banks to increase electronic payment. Just asking banks to promote/build awareness on debit cards can go a long way in growing the use of debit cards. Removing artificial blocks like high transaction fees can further accelerate the trend.
RBI noted in its circular that debit card is a secured product with the card usage being linked to the availability of funds in the accounts of the customers whereas credit cards are a part of the unsecured credit product portfolio of the issuers and there was no rationale for having similar MDR for both.
“Given this scenario, it is necessary to encourage the use of debit cards, especially at smaller merchants/service providers and location by way of lower MDR. This move would encourage all categories and types of merchants to deploy the card acceptance infrastructure and also facilitate acceptance of small value transactions. Further, in the case of the acquiring banks, a certain element of guarantee on the Return on Investment (ROI) is required for deepening the card acceptance infrastructure. A lower MDR with the expected increase in transaction volume on account of network effects would result in a reasonable ROI for acquiring banks,” said the circular.
Could not agree more!