Merchant Discount Rate

Merchant Discount Rate (MDR) can be defined as the fee payable by the merchant to the bank for processing debit or credit services. The payment contains the processing costs for each transaction made by the merchant. The rate payable to the bank shall be decided by the card-issuing bank and the network operators. The MDR is considered after the merchant, and the bank reviews the overall expenses of the business. The agreement is made to split the processing costs. However, the rates are also monitored by the Reserve Bank of India (RBI). The charge is applied for transmitting information of the cardholder to the bank registered by the merchant, to receive acceptance of electronic payment. The charge is included for the equipment and labour used to transmit the information from merchant to bank. The MDR is calculated based on a percentage of the total sales. The per cent is calculated depending on the turnover of the company.

MDR and Digital Economy

Moving rapidly towards Digital Economy, the Ministry of Finance (MoF) and the RBI focused on the less-cash economy. To promote a less-cash economy, MoF instructed banks to provide a platform to increase the usage of cards and install Point-of-Service (PoS) terminals. The primary importance of implementing digital transaction is to reap the benefits and set standards in cross-border trade. As a result, providing technological, equipment, infrastructure and skilled workers are required. In exchange for the services being provided for the digital transaction, the charges become applicable for the merchant.

Member Involved in MDR

Bank

The bank approves and provides a debit card or credit card for the account holders.

Merchant

Accepts to transact with the debit or credit card for the goods sold or services provided. To transact, the merchant sets up an account with the processor to accept the cards. For the services rendered by the processor, the merchant pays the agreed fee.

Processor

Processors provide support to manage complex transaction procedures. They provide services for the digital transaction by creating an account for the merchant.

Discount Fee

The discount fee is paid by all the merchants. The discount fee includes the processing and interchange fee. Hence, every transaction is being charged, and the entity processing the transaction will not be liable to pay an amount equal or below the interchange rate. The fee shall vary depending on the payment processing agreement.

Factors that Influence Discount Rates

The MDR has a complex transaction structure to protect the payment made by the cardholder to the merchant. In the case of any risks attached to the transaction made by the cardholder, the merchant becomes liable to a major degree. The merchant might be responsible for paying the unpaid dues if any. This scenario has been termed as Chargeback. The following are the factors that influence the MDR:

Credit rating of the registered business owner
Credit rating of the registered merchant
Type of the business registered by the business owner
Total turnover of the company
Monthly sales of the company

Factors that Influence Interchange Rates

The interchange rates are based on the risk involved with the transaction. The following are the other influencing rates for interchange rates:

Type of the Card (Premium, High Spend, Corporate or Infinite)
Processing method of the card (key entered, swiped, phone order or online)
Type of the industry registered for the transaction (SMEs, MSMEs, Oil and Gas, Grocery etc.)

Rates of MDR

The per cent of charge applicable for MDR is 2%. The following is the split of the 2%:

S. No.	Description	Per cent
1	Issuing bank (The bank of the cardholder)	1.25%
2	Card Network	0.15%
3	Merchant account provider (gateway service provider)	0.25%
4	Payment Link Provider (Provides who links the bank and card network)	0.10%
5	Acquiring Bank	0.25%

On 28th December 2019, the Finance Minister announced that Merchant Discount Rate (MDR) would be no longer applicable for digital transactions made through RuPay or Unified Payments Interface (UPI). The announcement will be implemented from 1st January 2020. For filing GST, click here