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Merchant Discount Rate - How It Works?

Published on Wednesday, December 20, 2017
merchant discount rate
Merchant Discount Rate is a commission that is charged by the bank from the merchant for card (debit/credit) services to their customers. This rate is determined by the RBI. This rate is payable by only by the merchant.

Parties Involved in Merchant Discount Rate

  • Only five parties are involved in the whole process of Merchant Discount Rate (MDR). Name of parties are as follow:
  • Customer: A person who pays to the merchant by the medium of debit card/ credit card/ BHIM UPI/ Aeps (Aadhaar Enabled Payment System).
  • Merchant: A person who receives payment from the customer by using PoS (Point Of Sale) machine.
  • Issuer bank: Bank who issues debit card/ credit card to the customer.
  • Network operator: Master card/ Visa card/ Rupay card/ American express/ Maestro card.
  • Acquiring bank: Bank who issues PoS (point of sale) machine to the merchant.

Process of Interchanging Information

How Merchant Discount Rate Works?

  • Whenever, merchant swipes a card through his PoS machine, on every transaction he has to pay a fixed percentage to acquire the bank. Then, acquiring bank distributes the amount between the network provider and issuer bank and some fixed amount will be kept by acquiring bank too.
  • Here, acquiring bank takes acquiring charge, Network operator takes interchange charge and issuer bank takes issuer charge and the sum of all these charges are known as merchant discount rate.
  • For example, if a merchant swipes the card for the payment of Rs. 200 then he has to pay 0.40% on Rs.200 i:e Rs. 0.8 to acquiring bank for providing PoS machine service. Now, this amount is disturbed between acquiring the bank, network operator, and an issuer bank.

Recent Changes in Merchant Discount Rate

  • The new change in merchant discount rate announced in the fifth bimonthly policy of 2017-18 by RBI.
  • RBI maximized Merchant Discount Rate on debit card transaction.
  • Merchant Discount rate rationalized on the basis of three criteria:
  1. On the basis of merchant turnover
  2. On the basis of QR based transactions
  3. Specifying a cap on the maximum MDR for both ‘card present’ and ‘card not present’ transactions
  • Small Merchants: According to recent changes, bank will not charge more than 0.40% from small merchants (whose turnover is up to 20 lakhs during the previous year ) when Physical POS infrastructure including online transaction and bank will not charge more than 0.30% from merchants when the transaction is based on QR code based card.
  • Note: Merchant discount rate cap of Rs. 200 per transaction.

  • Other Merchants: Bank will not charge more than 0.90% from other merchants (whose turnover is more than 20 lakhs during the previous year) when Physical POS infrastructure including online transaction and bank will not charge more than 0.80% from merchants when the transaction is based on QR code based card.
  • Note: Merchant discount rate cap of Rs. 1000 per transaction.

  • To promote India towards digitization, the government will bear MDR charges for 2 years up to the amount of Rs. 2000.
  • This will come into effect from 1st January 2018.

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