All you wanted to know about... merchant discount rate

The RBI’s monetary policy announcement last week proved a damp squib, with the committee deciding yet again to hold interest rates. But one announcement that added a bit of liveliness to the proceedings was the RBI’s decision to rationalise the Merchant Discount Rate or the MDR on debit card transactions from New Year. If the term merchant discount is conjuring up ‘50 per cent off’ and ‘Buy One Get One Free’ signs in your mind, quell your enthusiasm. The MDR has nothing to do with price-offs at your favourite stores.

MDR is the fee that the store accepting your card has to pay to the bank when you swipe it for payments. The MDR compensates the bank issuing the card, the bank which puts up the swiping machine (Point-of-Sale or PoS terminal) and network providers such as Mastercard or Visa for their services. MDR charges are usually shared in a pre-agreed proportion between them. In India, the RBI specifies the maximum MDR charges that can be levied on every card transaction.

With effect from January 1 2018, small merchants will pay a maximum MDR of 0.40 per cent of the bill value and others will shell out 0.90 per cent. To prevent those MDR charges from sky-rocketing, RBI has also set a monetary cap at ₹200 per bill for small merchants and ₹1,000 for large ones.

As per RBI rules, the merchant must cough up the MDR out of his own pocket and cannot pass it on to the customer.

To ensure wider adoption of plastic, banks must have more cards/PoS machines in circulation and more merchants need to install PoS terminals. Getting small merchants to install PoS machines has been a challenge, as cash transactions entail no extra costs to them, while cards do. Banks on their part are willing to increase PoS coverage only if their MDR share is lucrative.

The RBI’s latest move seems to be an attempt to resolve this tug-of-war. It allows banks to make a higher MDR fee off large merchants, while allowing the smaller fry to pay nominal fees. To calculate MDR, small merchants are defined as those with a turnover of upto ₹20 lakh in the previous year. They will pay an MDR of 0.4 per cent against 0.9 per cent for others.

Strictly speaking, because the MDR charges are borne by the store, you shouldn’t have to worry about how the RBI’s changes have impacted it. But you may still like to know that the RBI’s latest move helps to lightly pad up the profits of banks. Banks now stand to earn a higher fee from merchants on their card services and PoS machines. Earlier, MDR charges were based on the bill value for which the debit card was swiped. The size of the merchant swiping the card didn’t really matter. A fee of 0.25 per cent was levied on transactions up to ₹1,000, 0.50 per cent on those between ₹1,000 and ₹2,000, and a hefty 1 per cent on bigger-ticket purchases.

But come January, even tiny transactions with ‘large’ merchants like Reliance Retail, Flipkart, Big Bazaar or an Ola will attract a 0.90 per cent MDR. In fact, as most merchants with whom we use cards make a turnover of over ₹20 lakh a year, chances that a lion’s share of debit card payments will now attract a higher charge than before.

So, while your neighbourhood kirana store or boutique may acquire a brand-new swiping machine, the big-box retailer may nudge you to use cash for transactions below ₹1,000.

Net-net, with banks pushing and merchants pulling, it isn’t clear if the new MDR will discourage cash.

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