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Banking PAYMENTS

Merchant Discount Rate (MDR) – All You Need to Know

Last Updated on August 18, 2021

Have you ever heard the term MDR and confused as to what it is? Well! If yes, worry not, we are here to answer all your queries related to MDR or Merchant Discount Rate. Let’s start

What is Merchant Discount Rate?

Generally, it refers to the discount rate of a transaction. This equals to the entirety of all the payable taxes/charges, which an online or digital transaction necessitates.

Merchant Discount Rate includes all the bank charges charged by banks from all the customers and merchants to make their payment online or digital. The merchants set up the service, and before accepting the credit cards and debit cards for the processing of a settlement,  the merchants should agree to the rate.

MDR also includes the charges that an amount grossers to pay online or through a mobile wallet or needed to the bank for their service. The merchant discount rate may include all the charges, including interchange fees, miscellaneous fees referred to as zero-limit charges, gateway fees, cross-border fees, and assessment fees.

The MDR is the percentage part of the payment during any formal exchange of money. But this time, it is only based on digital and QR-based payments. The money the dealer pays is generally distributed between the following stakeholders:-

  • The bank
  • Vendors who access point of sale machine
  • And the card network provider.
Source – Atomtech

How Merchant Discount Rate Works?

It is the percentage of every transaction made. Merchant Discount Rate costs are dependent on the level of business transactions that the company processes. It also depends on the types of cards such as debit or credit cards used by customers, and the average transaction value, also known as average tickets or average sales. Usually, a customer obtains the goods and services from any merchant and pays their payment via their debit card or credit card. This process can also be completed using a point-of-sale [POS] device at the merchant’s physical location.

Suppose you went to a shop to buy any product. Now here you stand for consumers, and the shop stands for retailer or merchant. You make a digital payment by using a credit or debit card. The merchant using a point-of-sale (POS) terminal promotes this payment transaction. The bank charges MDR from the merchant when the customer pays the merchant.

Why is Merchant Discount Rate important?

  • Prepare a proper infrastructure for online payments to help to promote online payments help trade services and companies worldwide. Financial technologies allow making online payments more efficient with other organizations by building a POS system. This system provides options for credit lines and payment plans or other different kinds of loans. Processors are the essential parts of technological development in the processing of payments. The relationships between the payment processor and the merchant is vital to the trade infrastructure.
  • Dealers found it complicated to have the charges and agreements included in an account. They have many manufacturer’s options from where they can choose, and these suppliers will offer different fee cycles.  Dealers also make the payment by depositing processing fees and network and exchange fees to get the customer’s account. MDR is generally more for e-commerce payments because they need additional security costs.
  • Nowadays, people believe electronic payment to be the safest mode of money transaction. They get the option of paying from various sources to their clients using digital payment networks like NEFT, UPI, RTGS, etc. This has proved a vast profit to the clients and a dealer advantage. Most of the dealers will ask for minimum fees for using digital payment methods. This lowest charge on electronic payment also supports the cost of MDR.
  • Payment processing fee schedules are most complicatedly paid at a merchant discount rate for the retailers. However, some dealers levy a straight monthly charge. When the bank with an exchange provider is included in service contracts, the retailer discount rate for the retailers, but some may levy a flat fee on a monthly basis.  But when the dealing is with the bank only, then the merchant typically has a bundled MDR for the transaction to be in process.

MDR: A hot topic in the budget

Last year, there was an announcement. It stated that the businesses that have a turnover of Rs.50 crore should offer a digital payment offer on a low-cost basis to the customers. Additionally, the Merchant Discount Rate will not be levied on either customers or merchants.

In short, she addresses that neither the customer nor the merchant has to pay this overrated Merchant Discount Rate [MDR] while transaction of digital payments.

Who will bear the MDR costs?

This is the biggest question that arises when the customers and dealers both will not pay the MDR. Someone has to pay the MDR cost. During the budget speech, Our Finance Minister Nirmala Sitharaman addressed the nation and said. “RBI and Banks will absorb the costs from the savings that will accrue to them on account of handling less cash as people move to these digital modes of payment. The lawmakers are making the necessary amendments in the Income Tax Act and the Payments and Settlement Systems Act, 2007 to give effect to these provisions.

So, the RBI will bear the cost of MDR from now onwards.

MDR and Non-bank payment service providers

To support the digital world economy, the government announced significant changes in last year’s budget session. In the budget session of 2020, the government banned the merchant discount rate on merchants or consumers.  

The Finance Minister also added in her speech that this change in the digital transaction would lead to digital evolution. The parliament has made some strict rules to support this massive step of removing the Merchant Discount Rates for merchants. But on the other hand, the banks and merchants say that removing the MDR will hit their revenue stream as now the banks will need to pay MDR. Also, there is a disadvantage regarding the fee charged by merchants from consumers to recover merchant discount rate.

Frequently Asked Questions (FAQs)

1. Who sets Merchant Discount Rate?

Ans -When MDR prevailed in India, the bank from where the client processed the transaction used to set it.

2. How is MDR Calculated?

Ans – MDR is calculated from the given value of each processed transaction. The rates rely on the type of business, types of debt, and credit card used by customers.

3. Why is Merchant Discount Topic so popular?

Ans – The Merchant Discount Rate is popular in India because our Finance Minister banned this MDR in budget 2020.

4. Why is Merchant Discount Rate banned in India?

Ans – The Merchant Discount Rate is banned in India to promote digital transactions worldwide. Further, it creates a cashless community and facilitates safe money transactions.

5. What are the benefits of Merchant Discount Rate?

Ans – The key benefit of MDR was that it boosted transactions via home-grown payments systems, like UPI, at the dealer’s doorstep.