April 25, 2023

What is MDR (Merchant Discount Rate) and how does it work?

MDR (Merchant Discount Rate) is essentially a fee that a business pays to their lending institution for taking credit and debit card payments from clients. ‌

MDR pays the network providers (MasterCard and Visa), payment gateways, and the bank that instals the PoS (Point of Sale) interface for their services. MDR fees are calculated as a percentage of the transaction value and are proportionally split between the merchant and the bank.

MDR in India: How it works

When MDR was first applied, the merchandisers passed it on to the guests, which increased the number of cash payments as guests tried to avoid redundant charges.

To give cashless deals a drive, issuing banks had to increase the number of cards and PoS outstations in rotation, so they laboriously worked to get further merchandisers to install the outstations.

But this alone did n’t bring about the anticipated change. One on hand, issuing banks faced several challenges in getting small merchandisers to install PoS machines for case, one major challenge was that card payments included redundant costs for merchandisers compared to cash deals. On the other hand, banks were willing to increase PoS content only if the MDR share was profitable to them.

In a bid to address these issues, the RBI has decided to allow issuing banks to charge large businesses an advanced MDR figure, while small businesses are charged comparatively less.

MDR charges and threshold for businesses

Card payments

Businesses with development of over Rs. 20 lakhs in the former time are considered small businesses. Small business owners will pay a maximum MDR of0.4 of the bill value. Businesses with development lesser thanRs. 20 lakhs in the former time are considered medium and large businesses. Medium and large business owners will pay 0.9 of the bill value.

Also, RBI has set a MDR limit atRs. 200 per bill for small business possessors.

QR-based payments

A different set of rules are commanded for QR( Quick Response) grounded payments. For small businesses, the MDR will be 0.3 percent orRs. 200 per sale, whichever is lower. For medium and large businesses, the MDR will be 0.8 percent.

The government will bear MDR charges on deals up toRs.2,000 made through disbenefit cards, BHIM UPI or Aadhaar- enabled payment systems.

Impact of MDR on business possessors

Under the new rules laid down by RBI, business owners can no longer pass on the MDR charges to their guests. The MDR charges will be a ladder precious for deals of lower value. Still, for deals of advanced value, the MDR charges aren't likely to be precious

MDR and Non-bank payment service providers

With the end of supporting the digital frugality and cashless society, the government blazoned certain measures in the budget session last time. Last time, the government decided not to put MDR on merchandisers or consumers. You can find the statement made by Finance Minister Nirmala Sitharaman then" there are low- cost digital modes of payment similar as BHIM UPI, UPI- QR Code, Aadhaar Pay, certain disbenefit cards, NEFT, RTGSetc. which can be used to promote lower cash frugality. I, thus, propose that the business establishments with periodic development further than 50 crore shall offer similar low cost digital modes of payment to their guests and no charges or Merchant Discount Rate shall be assessed on guests as well as merchandisers."

Still, who'll bear the MDR cost? This was the answer given by the Finance Minister,

If not the trafficker.

“ RBI and Banks will absorb these costs from the savings that will accrue to them on account of handling lower cash as people move to these digital modes of payment Necessary emendations are being made in the Income Tax Act and the Payments and agreement Systems Act, 2007 to give effect to these vittles.

" As you can see, the FM has categorically stated that changes will be made in the rules to support this major step of removing MDR rates for merchandisers. But merchandisers and the banks are of the view that removing MDR will hit their profit sluice as banks will have to pay the MDR quantum. Also, merchandisers charging a figure from consumers to recover MDR rates will be at a disadvantage too.


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