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April 25, 2023

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What is Merchant Discount Rate (MDR) Charges?

MDR full form is Merchant Discount rate and it is a method of electronic payment, which means the fees paid by merchants for accepting credit/debit cards, UPI or wallet payments. It includes charges such as the ones levied by banks, service providers and intermediaries.

What is Merchant Discount Rate?

MDR charges are a minor percentage of the transaction value and is charged by the payment service provider or acquiring bank. It guarantees a smooth fund transfer between the customer and the merchant by paying for all operational expenses like payment gateway infrastructure, bank charges, and sometimes also fraud detection systems.

Consider this: if a customer makes a payment for ₹1,000 using a credit card to a merchant and MDR is 2%, then the Merchant will only get ₹980 and ₹20 is with the service provider.

Components of MDR Charges

Bank Charges: Compensates the issuing bank for processing the transaction.
Payment Processor Fee: Covers the services provided by gateways like Razorpay or Paytm.
Card Network Fee: Charged by card networks such as Visa, MasterCard, or RuPay.

MDR charges on UPI

The zero-cost structure for UPI users — which has been described as a game-changer for digital payments in India — is often lauded. But, MDR on UPI is charged only to the merchants in case of UPI transactions. Payment made for person-to-person transfers through UPI are often free but within the occasion of single transactions being at a better price level for enterprise transactions, an MDR cost is also levied.

To foster greater adoption by small merchants, a common regulatory motivation is to limit or reduce the MDR associated with UPI.

Is GST Applicable on MDR Charges?

GST is applicable on MDR charges too. Goods and Services Tax (GST): MDR is a service offered by banks and payment processors. Merchants, while calculating their take-home amount can only count for MDR after factoring 18% of gst generally applicable on it.

Say for a transaction, the MDR is ₹100, then an additional GST of ₹18 will come into play, bringing the total from the merchant to ₹118.

Merchant Discount Rate (MDR) Charges in India 2024

Payment Method	Card Network	MDR Percentage on Credit Card	MDR Percentage on Debit Card
Card Payments	Visa	1% to 3%	0.25% to 1%
Card Payments	Mastercard	1% to 3%	0.25% to 1%
Card Payments	RuPay	1% to 3%	0.25% to 1%
UPI Payments	UPI	0.25% to 0.75%	0.25% to 0.75%
Net Banking	Various banks	0% to 0.25%	0% to 0.25%
Mobile Wallets	Various providers	0% to 1%	0% to 1%

How Does the Merchant Discount Rate (MDR) Work?

This is a simplified breakdown of how MDR works

Customer Makes a Purchase:

The first step starts with the customer making payment for a purchase, using a debit/credit card

This prepares your transaction to process as the next step.

Payment with the details is redirected from the merchant’s POS terminal or payment gateway to the processor.

Authorisation Request:

The card issuer has to now authorize the transaction

Approval or Denial:

The card issuer verifies the customer's balance account or credit limit. In case of approval, the transaction is successful; if not, it gets declined.

Payment Settlement:

Once approved, the card issuer makes the payment to a payment processor, who then deposits the amount into the merchant’s account

Merchant Pays MDR:

MDR is paid by the merchant, which includes processing costs such as bank charges, network fees and more.

Key Points:

1, MDR rates may vary based on the type of card (credit or debit), the card network used (Visa, MasterCard, etc.) or the type of merchant and the amount.

2, Sometimes merchants also reduce their MDR by negotiating with their payment processor.

How Much Merchants Pay for Payment Processing

Fee structures vary widely by transaction and type of business — so merchants will have options. Online transactions tend to be more expensive to process because they have extra security requirements.

For example, Chase POS Payment Solutions They’re a leading payment processor in the U.S. and recently offered these rates:

In-person purchases (tap, dip, or swipe): 2.6% + $0.10 per transaction
Online transactions: 2.9% + $0.25 per transaction
Keyed-in transactions: 3.5% + 10 cents per transaction

Chase also has the ability to provide custom pricing for businesses with specific needs.

Most processors take a percentage or a flat-rate fee per transaction, while some offer a flat monthly fee. Fintech companies typically charge lower fees and traditional banks tend to charge higher fees. A merchant pays a fee, and that fee is typically shared between the payment processor and the credit card issuer, and occasionally other players in the transaction as well.

Why is MDR Important for Merchants?

Merchant Discount Rate is a crucial part of the digital payment ecosystem —

1. Costs: MDR is also an additional cost of business as it is an operational expense for merchants.

2. Promoting Digital Payments: The MDR on small transactions is controlled by the government and payment providers to ensure the inclusiveness of digital payments.

3. Cash flow management: since the merchants get the amount after deducting MDR, it affects their cash inflow.

Conclusion

Any business that accepts digital payments must learn about Merchant Discount Rate (MDR). Although MDR charges may appear to be a cost, it is instrumental in creating secure and optimum payment channels for businesses and customers.

Merchants have to stay vigilant about MDR norms, particularly as newer things like MDR on UPI emerges and continue over them for acceptable new deadlines on GST. This allows them to evaluate and exercise the best payment options for their specific needs and balance cost vs. customer experience efficiently.

FAQs

1. What is MDR (Merchant Discount Rate) in payment processing?

MDR is the percentage of the transaction amount that merchants pay as to carry out card/digital transactions

2. How does MDR differ between credit cards and debit cards?

Credit cards have a higher MDR (1%–3%) compared to debit cards (0.25%–1%) due to differences in processing costs and also regulations.‍

3. Are MDR rates the same across all card networks?

No, the MDR rates do change a little between card networks Visa, Mastercard and RuPay. However, you'd usually expect credit card fees to fall between 1% and 3%, and debit cards would be between 0.25% and 1%.‍

4. What is the MDR for UPI and mobile wallet transactions?

Usually, for UPI transactions, the MDR is about 0.25% – 0.75%. MDR for mobile wallet payments are typically around 0% to 1%, depending on the provider and type of transaction.‍

5. Are there any zero-MDR options for merchants?

Yes, the MDR for net banking is usually very minimal or zero and falls within 0% – 0.25%. Apart from zero-MDR for specific payment methods is also an attempt by some of the government or regulatory initiatives to promote digital payments.

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