Merchant Discount Rate
Understanding MDR- Merchant Discount Rate
- GS Prelims
- Economic concepts, Merchant Discount rate (MDR)
- Recently, the RBI has decided to rationalize the MDR on debit card transactions from New Year.
- In India, the RBI specifies the maximum MDR charges that can be levied on every card transaction.
- The rate charged to a merchant by a bank for providing debit and credit card services. The rate is determined based on factors such as volume, average ticket price, risk and industry.
- The merchant must set up this service with a bank, and agree to the rate prior to accepting debit and credit cards as payment.
- The MDR compensates the bank issuing the card, the bank which puts up the swiping machine (Point-of-Sale or PoS terminal) and network providers such as Mastercard or Visa for their services.
- MDR charges are usually shared in a pre-agreed proportion between them.
What are the changes?
- With effect from January 1 2018, small merchants will pay a maximum MDR of 0.40 per cent of the bill value and others will shell out 0.90 per cent.
- To prevent those MDR charges from sky-rocketing, RBI has also set a monetary cap at ₹200 per bill for small merchants and ₹1,000 for large ones.
- As per RBI rules, the merchant must cough up the MDR out of his own pocket and cannot pass it on to the customer.
- To calculate MDR, small merchants are defined as those with a turnover of upto ₹20 lakh in the previous year. They will pay an MDR of 0.4 per cent against 0.9 per cent for others.
- This has been done in order to ensure wider acceptance of plastic money and increase the spread of PoS machines (Point of Sale)