Have you ever wondered what happens once a debit or a credit card is swiped at a merchant (store / seller / vendor)? A lot happens! The chart below depicts the transaction cycle:
The last box represents MDR – Merchant Discount Rate. Now what is this MDR? MDR is a percentage + fixed rate (processing fees) charged by an issuing bank (service provider) to the merchant.
Let us decode this by understanding each player:
Service Providers:
Card issuing Bank: Apurva uses a credit card issued by Kotak Bank. Hence, Kotak Bank is the card issuing Bank in this case
POS (swipe machine): This is the Bank who has installed the POS (payment terminal) at the store
Network Providers: Mastercard, Visa, RuPay (Indian network provider)
Payment aggregator: A service provider like Citrus Pay, Razor Pay, Bill Desk – that enables merchants to facilitate digital or e-commerce transactions
Fees:
Amongst all the above service providers, there is an overall fee like Switching Fee, Interchange Fee, Payment Service Provider Fee – which together constitute the MDR charges.
The flow chart below explains the entire transaction cycle:
Why is MDR necessary? Various service providers as explained above are involved in any digital transaction. A fee is required to be charged in the nature of MDR fees which serves as a profit for these service providers. Absence of MDR fees will kill the industry and will leave no incentive to expand the digital currency.
FinFact: No MDR on payments made via RuPay Debit Cards or UPI (since 1st January 2020)! However, the buzz word is that the Government is contemplating a discounted MDR instead of a zero-fee model.
To Summarize:
MDR are the charges paid by merchants to the service providers
MDR is the maximum rate a merchant has to pay. They can negotiate with the service providers for a lower MDR fee.
MDR fees are regulated and capped by the Reserve Bank of India
MDR fees varies between 0.6%-3%
That’s it for now, until then, watch out this space for more articles!
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