In its fifth Bi-monthly Monetary Policy Statement on 5th December, the RBI decided to rationalise the Merchant discount rate structure. It will be in effect from 1st January 2018.
(Read: RBI’s Monetary Policy-Raises inflation forecast; keeps rates unchanged)
What is merchant discount rate (MDR)?
Merchant discount rate is a fee that a merchant has to pay to the bank for every debit card and credit card transactions.
To explain– Let’s say a Pantaloons store (merchant) has a swiping machine from Axis Bank. You swipe your SBI debit card (Visa) to pay for a dress at the store.
The Pantaloons store will have to pay MDR.
The MDR will be shared between the following in a pre-agreed proportion:
- The bank issuing the card- SBI Bank
- Card Network Providers- VISA
- The bank providing the swiping machine (also known as Point-of-Sale or PoS terminal)- Axis bank.
MDR is applicable on the following transactions:
- Swiping the card at point-of-sales (PoS) terminal.
- Online transactions
- QR code-based transactions
As per RBI rules, the merchant must pay the MDR out of his own pocket and cannot pass it on to the customer.
What is the recent decision taken with respect to Merchant Discount Rate?
The RBI has prescribed separate MDR ceilings for small and large merchants.
Currently, the MDR on the debit card is based on the value of transactions.
Hence, if you buy a dress worth Rs.500, the MDR is 0.25 %, irrespective of whether you buy it from a small merchant or a large merchant,
From 1st January, the MDR will be based on the turnover of the merchant.
The RBI has classified merchants into two categories—small merchants (with turnover of up to Rs20 lakh during the previous financial year), and large merchants (with turnover above Rs20 lakh during the previous financial year).
- Small merchant – MDR is capped at 0.4 % for PoS and online card transactions and 0.3 % for QR code-based transactions. In both cases, Rs 200 has been set as the absolute cap.
- Large merchant – MDR is capped at 0.9% for PoS and online card transactions and 0.8% cap for QR code-based transaction. In both cases, Rs 1000 has been set as the absolute cap.
To summarise, RBI has rationalised MDR based on the following criteria:
- Categorisation of merchants on the basis of turnover.
- Adoption of a differentiated MDR for QR-code based transactions.
- Specifying a ceiling on the maximum permissible MDR for both ‘card present’ and ‘card not present’ transactions.
What is the rationale for the decision?
Small merchant will have to pay a nominal MDR. Large merchant will have to pay a higher MDR
This decision has been made to achieve two objectives:
- encourage small merchant to install PoS terminals and accept debit card payments.
- encourage banks to increase PoS coverage by making it profitable for them. Large merchants like Flipkart, Amazon, Big Bazaar etc. which account for the higher volume of online transactions will have to pay higher MDR.
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References
All you wanted to know about MDR- The Hindu
De-jargoned: MDR on debit cards- Livemint