The Indian Government made significant decisions on Merchant Discount Rate on 1st January 2020. It abolished the burden of MDR during transactions of digital payments from customers and merchants.
From this article, aspirants can obtain all the details on MDR that are essential for the UPSC exam and IAS preparation.
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Before starting off with this topic, candidates can first get answers to two common questions related to MDR: |
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What is the Merchant Discount Rate?
The MDR or Merchant Discount Rate is levied on credit and debit card payments to a trader for payment processing services. It comprises all the charges and taxes required to pay digitally.
A merchant must set up this service and acknowledge this rate before taking card payments. It is also a pivotal element to consider while calculating the company’s overall expenditure.
Also read about the Digital India campaign, launched by the government of India to make government services available to citizens electronically by online infrastructure improvement and also by enhancing internet connectivity.
How does the Merchant Discount Rate Work?
Generally, the fees for the payment processing of a transaction varies, depending upon the following factors:
- Business size
- Type of card being used to pay
- Value of the transaction
Now, given below is an example of a merchant discount rate that states how it actually works:
- A shop acts as a retailer or merchant where a person purchases something.
- If the person pays with his card, the merchant facilitates the transaction using a POS terminal.
- A POS or Point of Sale terminal is an electronic device that a retail shop uses to process a card payment.
- Right after the payment is made, the bank charges the Merchant Discount Rate from that retailer.
- This fee is then divided between the card’s issuer, payment network, and the POS terminal provider.
Complement your preparation with the UPSC Syllabus for economy-related links given below:
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List of Different Types of Banks in India- Category and Functions |
Mission Indradhanush for PSBs – Revamping Public Sector Banks |
Importance of Payment Processors
A POS terminal works as a payment processor. It is a well-established apparatus that serves all sorts of seller payments. Below are some significant benefits of payment processors:
- It brings the opportunity to the customers to pay from various payment sources. It is an advantage for both customers and retailers.
- Many retailers charge a minimum fee for paying with an electronic payment processor. This small charge will help traders pay the MDR.
- Payment processors help to pay and trade across the world.
- Financial technology eases the payment process for companies developing POS or point-of-sale systems. It also offers many options for payment plans, credit lines and loans.
Recent Updates on Merchant Discount Rate
The declaration of the Finance Minister of India, Nirmala Sitharaman, aims to encourage digital payments. It came into action from 1st January 2020, which includes the following aspects:
- Mandates offering low-cost digital payment options to customers for businesses with an annual turnover of over Rs. 50 crores.
- These payment modes encompass options such as Debit Cards, BHIM UPI, UPI QR Code, NEFT, Aadhaar Pay, and RTGS.
- At present, it is applicable only on online and QR-based transactions.
Definitions of Some Essential Terms Related to MDR
Below are the definitions of some terms related to Merchant Discount Rate, which are important for UPSC.
Merchant Processor: When a merchant designates a company to look after all transactions from various channels, it is called a Merchant Processor.
Payment Aggregator: Payment aggregators are service providers who allow merchants to expedite e-commerce or digital transactions. They help merchants to receive card (credit or debit) payments, without generating a merchant bank account.
Point-of-sale or POS Terminal: A POS or Point of Sale Terminal is an electronic device that retailers or merchants use in their shops to generate card payments.
Assessment Fees: These are charges levied on merchants or cardholders depending on their card usage. Visa, Mastercard and Discover levy a minimum rate of fixed percentage on the total monthly purchases with their credit or debit cards.
Interchange Fees: Card associations charge predetermined Interchange Fees for each type of transaction with that card.
It concludes by saying that abolishing the charges of Merchant Discount Rate is a significant move to build a less-cash economy. It is also effective to uplift payments via an indigenous and contemporary payment system, UPI and RuPay.
All these particulars on MDR are comprehensive and essential for UPSC prelims. However, aspirants must keep reading other current affairs on this topic to escalate their preparation.
Other related links:
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SWIFT (Society for Worldwide Interbank Financial Telecommunication) |
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Frequently Asked Questions on Merchant Discount Rate
What is the meaning of the Merchant Discount Rate?
The MDR indicates the charges imposed on traders to provide payment processing services on digital transactions.
Who are the participants that get the share of MDR?
Below are the participants who share the MDR after successful payment:
- Bank
- Payment network provider
- POS terminal provider
How is the MDR calculated?
The MDR is a percentage of the value of a transaction. It typically depends on the size of a business that takes the payment and the type of card (debit or credit) someone uses to pay.
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