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What is the full form and meaning of MDR

Summary: Explore the key aspects of Merchant Discount Rate (MDR), including its definition, breakdown, application, benefits, and strategies for merchants to reduce MDR costs in the digital payments landscape.

21 Dec 2023 by Team FinFIRST

What is MDR

MDR refers to the fee charged to a merchant by a bank for accepting payments from customers via digital modes like credit cards, debit cards, UPI etc. This article provides a detailed overview of key aspects of MDR including its full form, applicable charges, benefits, recent changes and ways for merchants to reduce MDR costs.

What is the full form and meaning of MDR?

MDR stands for Merchant Discount Rate. It is a fee charged from merchants or business owners when they receive payments from customers via digital methods.

MDR essentially is a percentage deduced from the transaction amount before the remaining amount gets credited to the merchant. It is the cost paid by the merchant to the bank or payment gateway for providing digital payment acceptance services.

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Breakdown of MDR charges

MDR charges consist of:

Interchange fee – Paid to the bank that has issued the credit/debit card to the customer
Processing charges – Paid to the payment processor or gateway
Network fee – Paid to payment networks like Visa, Mastercard, NPCI
Service tax – Applicable GST on the sum total of above fees

So MDR = Interchange fee + Processing charges + Network fee + GST

How are MDR charges applied?

MDR is applied as a percentage of the transaction amount. Following are the typical MDR charges for different modes of digital payments in India:

Credit cards – 1% to 3% of transaction value
Debit cards – 0.25% to 1% of transaction amount
UPI payments – 0.25% to 0.75% charge on payments
Netbanking – 0% to 0.25% of transaction value
Mobile wallets – 0% to 1% depending on wallet provider

MDR charges are automatically deducted from the merchant’s account at the time of settling the transactions batch.

Objectives and benefits of MDR

MDR mechanisms serve the following purposes:

Provide revenue to banks and gateways to manage payment networks
Maintain security and efficiency of digital payment systems
Cover risks and charges involved in digital transactions
Promote cashless transactions among merchants/customers
Bring standardization and uniformity in fee structures
Enable access to payment acceptance infrastructure easily

By paying MDR, merchants can easily provide convenient digital payment options to customers. It provides the backend infrastructure seamlessly.

How merchants can reduce MDR costs

While MDR charges are meant to be standardized, merchants do have some options to reduce the impact of MDR costs on their revenues. Here are some tips for merchants to consider for lowering their overall MDR payouts:

Negotiate with banks

Large merchants who process very high volumes of digital transactions can negotiate with their banks for lower MDR rates. Banks could be willing to lower charges for big merchants in order to retain their business. Retail chains, online sellers etc. could negotiate based on monthly volumes.

Encourage UPI

As UPI payments have zero MDR on transactions up to Rs 1000, merchants can incentivize customers to pay via UPI instead of credit cards. This will lower the volume of credit card swipes, which have higher MDR.

Consider new merchant accounts

Certain banks do provide lower MDR merchant accounts to acquire new SME clients. New merchants must evaluate such offers before selecting their payment acceptance bank to save on MDR for the long term.

Conclusion

To promote a cashless economy, understanding MDR components, costs and negotiation strategies is important for merchants and customers alike. With the right knowledge and constant monitoring, merchants can optimize their digital payment acceptance costs. UPI and RuPay adoption can be encouraged by educating stakeholders about MDR. Thus, transparency and awareness about Merchant Discount Rate would benefit the entire digital payments ecosystem.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.

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