Banking Article, Banking Finance 2020, Banking Finance September 2020

Digital Payments and Merchant Discount Rate (MDR)

MDR has once again come into the news headlines with an announcement by India’s Finance Minister Smt. Nirmala Sitharaman last month December 2019.

The news is –“ From 1st January, 2020, businesses with an annual turnover of more than Rs.50 crore will have to offer low cost digital payment options to customers and Merchant Discount Rate (MDR) will not be levied on either customers or merchants.”

What is MDR

MDR is the cost paid by a merchant to a bank for accepting payment from their customers via credit or debit cards every time a card is used for payments in their stores.

In simple word we can say,

MDR is a fee charged from a merchant by a bank for accepting payments from customers through credit and debit cards in their establishments.

MDR compensates the card issuing bank, the lender which puts the PoS terminal and payment gateways such as MasterCard or Visa for their services.

How MDR is fixed

MDR charges are usually shared in pre-agreed proportion between the bank and a merchant and are expressed in percentage of transaction amount.

The rate is determined based on below mentioned factors

  • Volume
  • Average ticket price,
  • Risk
  • Industry

The merchant discount rate is expressed in percentage of the transaction amount.

Impact of Demonetization

Demonetization fuelled the digitization and digital payments in our country where people always thought that Cash is the King. Cash and paper instruments have been the conventional mode of payment. But these days Cash is second option. The customer chooses first Digital mode to pay whether it is payment for movie ticket or hotel charges.  More Indians from smaller towns and cities are paying digitally for goods and services, raising expectations of sustained growth for non-cash payments, even as Reserve Bank data indicates the sharp spike in digital transactions following the 2016 note ban has evened out following year Payments company executives estimate that card transactions in towns with populations of up to 1 million have doubled in the three years since demonetization.

RBI had decided to slash merchant discount rate (MDR) charges on payments made through debit cards and do away with levies on small transactions through mobile phones and Internet from 1 January to 31 March 2017 to encourage digital transactions.

Following the demonetization drive, MDR was further reduced for transactions up to Rs 1000, to 0.25 per cent of the transaction value. For transactions above Rs 1000 but less than Rs 2000, MDR was kept at 0.5 per cent of the transaction value.

Recent Development in merchant discount rate (MDR)

The Government has decided that From 1st January, 2020, businesses with an annual turnover of more than 50 crore will have to offer low cost digital payment options to customers and Merchant Discount Rate (MDR) will not be levied on either customers or merchants.

Low cost digital payment modes

Low cost digital payment modes will include following digital apps/ platform

  • BHIM UPI,
  • UPI QR Code,
  • Aadhaar Pay,
  • Debit Cards,
  • NEFT,
  • RTGS, among others.

The move is expected to boost payments via home-grown real-time payments system Unified Payments interface (UPI) at merchant locations, along with RuPay debit cards.

Presently, it is applicable for online transactions and QR-based transactions.

The amount that the merchant pays for every transaction gets distributed among three stakeholders–the bank that enables the transaction, vendor that installs the point of sale (PoS) machine and the card network provider such as Visa, MasterCard, RuPay.

There are some other point of view regarding the latest development:-

Vishwas Patel, the Payments Council of India Chairman, said, “The zero MDR on RuPay and UPI will kill the industry and make the business model unviable. It’s like nationalization of the payments industry. If the government wants to drive digitization, then it should bear the cost.”

If the government wants to push digital payments, then making MDR zero is not the solution, but a lower, controlled MDR along with added tax benefits to merchants will go a long way.

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