Merchant Discount Rate

Understanding MDR- Merchant Discount Rate

Relevancy:

  • GS Prelims
  • Economic concepts, Merchant Discount rate (MDR)

Recently:

  • 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.

Understanding MDR:

  • 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)

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