How does the Merchant Discount Rate work?
Merchant Discount Rate or MDR is a charge that merchants pay every time a debit card or credit card is swiped at their end for a transaction by a customer. This charge, typically 1% of the transaction, goes to the company that has installed the Point of Sale (PoS) machine, the network provider such as MasterCard, Visa or RuPay, and the card-issuing bank.
What is the controversy over MDR?
To promote cashless transactions following the scrapping of high-denomination currency notes, the government had waived the MDR on fuel purchases for consumers. But after the expiry of the 50-day window, banks decided to levy MDR on fuel pump owners, making them bear 1% on all credit card transactions, and between 0.25% and 1%on all debit card transactions from January 9. Petrol pumps across the country protested, deciding not to accept plastic money from customers for fuel purchases. According to the All India Petroleum Dealers’ Association, the profit margins of fuel retailers are fixed on a per-kilolitre basis, and with the huge increase in the number of card transactions post-demonetisation, their margins have been impacted — and they can no longer bear the additional charges levied by banks in the form of MDR. The petrol pumps, however, deferred their agitation late on January 8 after the transaction charges were deferred until January 13.
But why do banks levy MDR?
According to Avinash Luthria, vice-president, Financial Processing and Licensing at Worldline South Asia and Middle East, MDR is the main source of funding for card transactions for the issuing banks, network providers and the company or bank that has installed the PoS machines. “The main component of the MDR is interchange — a charge that is paid by the company that has installed the PoS machines to the issuing bank. The MDR also funds the network fee and the cost incurred in running the PoS machines. The MDR is unavoidable,” Luthria said. Worldline is a prominent payment processor in India.
And what has the RBI said on MDR?
In a bid to push debit card transactions, the RBI on December 16 capped the MDR on transactions of up to Rs 1,000 at 0.25% and for those between Rs 1,000 and Rs 2,000 at 0.5%. The cap, RBI said, would be in place until March 31, 2017. However, last week, India’s largest lender, the State Bank of India, waived the MDR for all small merchants with a turnover of Rs 20 lakh or less for a year until December 31, 2017.