The government needs to heed to the High Court ruling and come out with the clear rules on charging of merchant discount rate, writes Anuj Kaila
In a decision that could affect millions of credit and debit card holders in the country, the Delhi High Court recently passed an order asking the Ministry of Finance and the Reserve Bank of India to regulate the levy of surcharge on payments made using debt and credit cards.
What is this surcharge? When a merchant signs up with a bank to receive credit card payments, he agrees to pay a fee to the banks for the same. This is referred to as merchant discount rate (MDR). Globally, this fee is generally 2.5%. The fee is shared by the banks and the credit card organisations like Visa or Mastercard.
A 2.5% commission is something a large retailer can live with, based on the principle, whether correct or not, that by accepting credit cards, one will do more business than if one accepted only cash. For some retailers though, the 2.5% commission can be substantial. For example, if your margins are only 5%, then by paying 2.5% MDR, one is losing half of one’s margin. So some retailers insist on charging an extra 2.5%, in order to recover the MDR. This is generally a breach of contract as credit card organisations bar merchants, other than petrol pump outlets, from passing on the MDR. The merchants pass on MDR to the customers on the pretext of additional fees or a surcharge. The consent of the customer is obtained prior to the merchant levying the ‘additional fees’. The customers are usually not given an option in relation to bearing the surcharge. Customer has to either bear the additional fees or pay by cash. In fact, many government agencies also pass on MDR to the public. The biggest example of this is the Indian railways website (IRCTC). This website levies a surcharge on all electronic payments that varies depending on the type of electronic payment.
In the case of petrol pump outlets, the approach is slightly different. Margins are fairly low and the MDR has a significant effect on profitability. At the time of payment, the customer pays only the cost of the fuel and no additional fees are added to the transaction. However, on receiving the statement of the card, it can be seen that the amount charged for the transaction at the petrol pump is more than the amount swiped for. The additional amount is the surcharge or MDR which is added to the total transaction value and is charged to the customer. This is unfortunate as the customer does not know that he will be paying the extra charge. If you read the fine print of the agreement given by your bank, it will actually be mentioned there and you might see sign boards at the petrol pump outlets as well. At one time, an oil company had an agreement with one large private bank that its fuel stations would use terminals only of that bank. This meant that card holders of all banks ended up bearing MDR, card holders of that bank. The competition tribunal struck down this agreement as anti competitive.
Charges over MDR
A bigger problem is merchants charging even more than the MDR, thereby gaining extra money than the price or the bill presented to the client. It can be reasonably argued that this is defrauding the customer and is illegal and should be prohibited.
It is not to say that the RBI has not been conscious of these issues. For debit card transactions, it has capped the MDR at 0.75% for transactions up to Rs 2,000 and at 1% for transactions above Rs 2,000. However, there is no similar cap on MDR for credit card transactions.
Paper on card acceptence
In order to move towards ‘less-cash’ society by developing a card acceptance infrastructure, RBI in March 2016, came out with a concept paper on card acceptance infrastructure to deal with hurdles in relation to cashless payment.
Some of the key discussion points were to either cap MDR or have differentiated MDR for different sectors of merchants, for example — utility bill payments (electricity, water, gas, telephone), municipal taxes, primary hospitals and health centres, would have no or negligible MDR.
This may have an adverse effect as credit and debit card institutions would have less incentive to sell POS terminals to those sectors. However, the sheer potential of massive volumes which card payments can generate should provide sufficient incentive to the credit and debit institutions. Other points up for discussion include capping MDR for credit cards, fixed fee of MDR instead of ad-valorem charges and MDR for the customer to government sector.
The Government of India is also taking steps to bear MDR like other merchants. The Ministry of Finance has issued a direction to all government organizations in this regard. This is a positive direction from the Government to encourage the use of electronic payments or card payments and do away with the logistic hassle of dealing with cash. This is also a small step towards curbing corruption and black money.
A neccessary evil
MDR is a necessary evil which we must continue to live with. Regulating MDR and keeping all stakeholders happy is a huge challenge for the RBI. To achieve the goal of financial inclusion, the role of credit and debit card institutions is extremely important.
The credit and debit card institutions are not non-profit organisations and will always consider their earnings prior to the larger picture of the government.
However, credit and debit card institutions have shown willingness and eagerness in government initiatives which is evident from the success of the Pradhan Mantri Jan Dhan Yojana (PMJDY). To sustain the issuance of 188.6 million (and counting) Rupay cards during PMJDY, RBI and the credit and debit card institutions will need to work together to ensure MDR is charged reasonably.
It is important, therefore, that the government heeds the call of the High Court and comes out with clear rules on charging of MDR. These rules need to consider several factors such as the need to promote cashless payments, the profit interests of credit card organisations, banks and merchants and ensuring transparency and convenience for customers.
(The author is a banking lawyer with Kochhar & Co)