Roadmap for Banking of the Future

Merchant Discount Rate (MDR)

If a shopkeeper (referred to as a merchant) wants to accept payment using Debit/Credit Cards, he/she has to make arrangements Point of Sale (PoS) Machine. He gets this PoS machine from some bank. Say the shopkeeper approaches HDFC Bank for this PoS machine and HDFC Bank installs the PoS at the shop.

Since the bank provides payment services to the merchant, it will charge the merchant for using the payment infrastructure set up by the bank. This service charged by the bank or other entity involved in this process is known as Merchant Discount Rate.

Definition of MDR

Merchant Discount Rate: It is the rate or fee being charged on the merchant by the service providers at the time the customer makes the payment using his/her card on the PoS machine.

The service providers that come into the picture are-

Bank installing PoS: The Bank that has installed the PoS Machine
Card issuing Bank: The Bank whose card has been used for making the payment
Payment Gateways: These are the entities that provide technology infrastructure to route and facilitate the processing of an online payment transaction without any involvement in the handling of funds. Example: These mainly includes banks like HDFC, AXIS, ICICI Bank.
Payment Aggregators: These are entities that facilitate e-commerce sites and merchants to accept various payment instruments from the customers for completion of their payment obligations without the need for merchants to create a separate payment integration system of their own. They pass on the payment to the merchant after some point of time. Payment Aggregator is the inclusion of all these payment gateways. Examples: Citrus, Billdesk, Instamojo, CCAvenue and PayUMoney

When is MDR Charge applicable?

MDR charges are applicable on the merchants when the payment by the customer is made using all debit card/BHIM UPI/ Aadhaar enabled Payment System (AePS) transactions and QR based transactions.

Points to remember about MDR Charges

MDR charges are to be paid by the merchant to the service providers and not by customers. Merchants should not pass on the charge to the customer.
MDR rates are fixed by the Reserve Bank of India.
MDR is the maximum charge that a merchant has to pay to the service provider. If a merchant can bargain with the service providers he/she can pay less than MDR charges fixed by RBI. MDR denotes the maximum rate that can be charged by the service provider and it can also be less than the limit fixed by RBI.

Why is MDR necessary?

There are Payment Gateways and Payment Aggregators involved in online transactions. MDR charges serves as a profit for them. Absence of such MDR charges will kill the industry and will leave no incentive to expand the universe.

Present MDR Charges

MDR charges for transactions made through RuPay (Debit Card) and UPI platforms= 0% (Nil) w.e.f January 01, 2020
MDR charges for payments made to establishments having turnover in excess of Rs 50 crore= 0% (Nil)
MDR Charges on Debit Card (for transactions less than Rs 2000)= 0% (Nil)
MDR Charges on Debit Card (for transactions more than Rs 2000)= 0.60% for transaction above Rs. 2,000 with a maximum cap of Rs 150 per transaction.
MDR Charges on card-based QR transactions (Bharat QR)= 0.50% with a maximum cap of Rs 150 per transaction.

How the cost is borne in case where MDR is zero?

The RBI and banks will absorb these costs from the savings that will accrue to them on account of handling less cash as people move to the digital modes of payments.

Banking Awareness: Merchant Discount Rate (MDR)