MUMBAI: The Reserve Bank of India ( RBI ) has questioned a government proposal to dramatically lower charges on debit card transactions for pushing the Digital India story in the aftermath of demonetisation In multiple meetings and video-conferences held last week with the banking regulator and large lenders, a cabinet minister along with senior government functionaries have suggested that the merchant discount rate (MDR) – the rate charged to a merchant by a bank for providing card services – should be either done away with or substantially lowered till March 31, 2017.In one such meeting, RBI Deputy Governor R Gandhi has voiced concerns over the outcome of such a measure which could make the business unsustainable for many banks. Large banks like SBI and ICICI have also expressed their reservations about the proposal.“Mr Gandhi said that any reduction in charge has to be done keeping in mind the cost considerations for banks. The government is keen to significantly lower charges for transactions below Rs 1,000 and Rs 2,000 where charges vary from 75 to 100 basis points,” a person familiar with discussions told ET.“It was also discussed whether the charges could be lowered or scrapped for merchants located in smaller towns which today account for only a small share of the card transactions. But this could be a monitoring and compliance challenge,” said another industry source.Indeed, large retail houses, hotels and other top merchants are the biggest beneficiaries of the government’s decision to scrap debit card MDR till December 31.Experts in payments business say that lowering debit card MDR aggressively may hold back banks from rolling out point of sale (PoS) terminals – electronic devices which are used by retailers to process card payments; also, a nominal or zero charge on debit cards could make many merchants reluctant to accept credit cards where the MDR is around an average of 170 basis points.The conversations in some of these meetings brought out on one hand the urgency felt by the government in showcasing the use of digital and electronic money as a positive upshot of demonetisation and on the other hand, the hurdles like poor consumer awareness and low profit incentive that have to be overcome for making any meaningful change.Of the 74 crore debit cards and 2.7 crore credit cards in India, the total value of transactions (through PoS machines) is Rs 21,225 crore and Rs 29,866 crore a month, respectively. Against 15 lakh PoS terminals in the country, the government has set a target for banks to deploy 10 lakh terminals over the next three months.Here’s how a veteran in payments technology sums up the present situation: “There are multiple technologies and services such as cards, RuPay cards, UPI (unified payments interface), wallets, Aadhaar-enabled payments, USSD (unstructured supplementary service data which can be used to transfer money using a basic feature phone with no Internet connection).There are plans to integrate UPI (used for fund transfers up to Rs 1lakh) and USSD by end December so that a smartphone user and a feature phone user can interact to carry out transactions.The government has to decide how to prioritise, which services to back for celebrity endorsement, and discuss with stakeholders to lay down a clear, realistic road map. At present there is too much confusion and too little user education. The government is in a hurry. Banks are requesting the government not to sacrifice commercial considerations; they are also asking for light know-your-customer formalities to compete with pure digital wallet companies which allow any vendor without a current account or business establishment to download apps to accept or pay digital money.”According to the person, card transactions are always going to be expensive because of the infrastructure cost.“For banks to be able to work on lower margins, the need is to shift to lightweight web solutions like USSD and UPI (which work on smartphones).”Besides waiving off service charge on digital transactions till December 31, the government has announced extra discounts for card transactions in petrol pumps, toll booths railway ticket counters etc, and has directed the rural development bank Nabard to help banks install two PoS terminals across 1 lakh villages with a population of 10,000. Its ministers and top bureaucrats are now thinking what may be the next big announcement.