Why in the News?
The Finance Ministry has firmly denied recent online rumours suggesting that the government is planning to impose Merchant Discount Rate (MDR) charges on UPI transactions.
About Merchant Discount Rate (MDR):
- Overview: MDR refers to the fee charged to merchants by banks or payment service providers for processing digital payments made via credit cards, debit cards or other digital modes.
- Purpose: It serves to compensate multiple stakeholders involved in a digital transaction, including the issuing bank, acquiring bank, payment gateway, and network operator.
- Fee Structure: MDR is typically calculated as a percentage of the total transaction amount, usually ranging from 1% to 3%, depending on the transaction and merchant type.
- RBI Regulation: The Reserve Bank of India (RBI) regulates MDR, and merchants are NOT permitted to pass this fee onto customers.
- Discontinuation: To promote cashless payments, the government waived MDR on UPI and RuPay card transactions in 2020, benefiting small merchants and consumers.
How does it work?
- Transaction Flow: When a customer pays digitally, the payment amount is credited to the merchant’s account after deducting the MDR fee.
- Example: If a customer pays ₹1,000 and the MDR is 2%, the merchant receives ₹980, while the remaining ₹20 is distributed among the banks and service providers.
- Automatic Deduction: The MDR amount is automatically deducted by the settlement system at the time of transaction processing.
- Variable Rates: The MDR rate may vary depending on factors such as the type of card used, nature of business, monthly transaction volume, and average transaction value.
- Merchant Agreements: Merchants are required to sign MDR agreements with their payment service providers before they begin accepting digital payments.
- Operational Cost: MDR is treated as a part of the merchant’s operational costs when offering customers the convenience of digital payment options.
| [UPSC 2017] Which one of the following best describes the term “Merchant Discount Rate” sometimes seen in news?
Options: (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. |
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