MDR (Merchant Discount Rate) is basically a fee that a merchant is charged by their issuing bank for accepting payments from their customers via credit and debit cards.
MDR compensates the bank issuing the card, the bank which installs the PoS (Point of Sale) terminal and network providers (MasterCard and Visa), and payment gateways for their services. MDR charges are proportionally shared between the merchant and the bank, and the charges are expressed as a percentage of the transaction amount.
MDR in India: then and now
When MDR was first applied, the merchants passed it on to the customers, which increased the number of cash payments as customers tried to avoid extra charges.
To give cashless transactions a push, issuing banks had to increase the number of cards and PoS terminals in circulation, so they actively worked to get more merchants to install the terminals.
But this alone didn’t bring about the expected change. One on hand, issuing banks faced several challenges in getting small merchants to install PoS machines — for instance, one major challenge was that card payments entailed extra costs for merchants compared to cash transactions. On the other hand, banks were willing to increase PoS coverage only if the MDR share was profitable to them.
In a bid to address these issues, the RBI has decided to allow issuing banks to charge large businesses a higher MDR fee, while small businesses are charged comparatively less.
MDR thresholds for businesses
- Card payments
Businesses with turnover of up to Rs. 20 lakhs in the previous year are considered small businesses. Small business owners will pay a maximum MDR of 0.4% of the bill value. Businesses with turnover greater than Rs. 20 lakhs in the previous year are considered medium and large businesses. Medium and large business owners will pay 0.9% of the bill value.
Also, RBI has set a MDR limit at Rs. 200 per bill for small business owners and Rs. 1,000 for the others.
- QR-based payments
A different set of rules are mandated for QR (Quick Response) based payments. For small businesses, the MDR will be 0.3 percent or Rs. 200 per transaction, whichever is lower. For medium and large businesses, the MDR will be 0.8 percent or Rs. 1,000 per transaction, whichever is lower.
The government will bear MDR charges on transactions up to Rs. 2,000 made through debit cards, BHIM UPI or Aadhaar-enabled payment systems.
Impact of MDR on business owners
Under the new rules laid down by RBI, business owners can no longer pass on the MDR charges to their customers. The MDR charges will be a tad expensive for transactions of lesser value. However, for transactions of higher value, the MDR charges are not likely to be expensive.