Merchant Discount Rate

The Merchant Discount Rate (MDR) is the fee charged to a merchant for accepting a digital payment. It is generally collected by the merchant's acquiring bank or payment service provider and is usually calculated as a percentage of the transaction value, though it may also include a fixed component.

How MDR works

When a customer makes a payment, the merchant usually receives the transaction amount after deduction of MDR. For example, at an MDR of 1 per cent, a payment of Rs 1,000 yields Rs 990 to the merchant, before considering applicable taxes or other charges.

• The customer ordinarily pays the purchase price, while the merchant bears the MDR as the cost of accepting the payment.
• MDR is called a discount rate because the merchant is settled an amount lower than the transaction's face value.

Components and participants

MDR may finance several participants involved in processing and settling a payment. Its allocation depends on the payment instrument and the commercial arrangements among participants.

• In a card transaction, MDR may include the interchange fee paid to the card-issuing bank, network fees, processing costs and the acquirer's margin.
• MDR and interchange are not identical: interchange is one possible component of the total merchant charge.
• MDR helps payment providers recover costs related to infrastructure, processing, settlement, security and customer support.

Regulation and economic significance

Payment charges affect both merchant acceptance and the financial viability of payment infrastructure. Lower MDR can encourage digital acceptance, but inadequate revenue may shift the cost of maintaining the system to banks, payment providers or public support.

• Under Section 10A of the Payment and Settlement Systems Act, 2007, banks and payment system providers cannot impose charges for prescribed electronic payment modes.
• The prescribed modes include BHIM-UPI and RuPay debit cards, resulting in zero MDR for transactions through these modes.
• MDR regulation seeks to balance affordability, wider digital adoption and a sustainable payments ecosystem.

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