SET C – Q 91
Which one of the following best describes the term “Merchant Discount Rate” sometimes seen in news?
(a) The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank.
(b) The amount paid back by banks to their customers when they use debit cards for ﬁnancial transactions for purchasing goods or services.
(c) The charge to a merchant by a bank for accepting payments from his customers through the bank’s debit cards.
(d) The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Sale (PoS) machines and debit cards.
Answer – c
MDR is the fee that the store accepting your card has to pay to the bank when you swipe it for payments. 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. In India, the RBI specifies the maximum MDR charges that can be levied on every card transaction.
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.
Why is it important?
To ensure wider adoption of plastic, banks must have more cards/PoS machines in circulation and more merchants need to install PoS terminals. Getting small merchants to install PoS machines has been a challenge, as cash transactions entail no extra costs to them, while cards do. Banks on their part are willing to increase PoS coverage only if their MDR share is lucrative.
The RBI’s latest move seems to be an attempt to resolve this tug-of-war. It allows banks to make a higher MDR fee off large merchants, while allowing the smaller fry to pay nominal fees. 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.