MDR, charges and more

Tanisha Sabherwal
Tanisha Sabherwal
July 22, 2021

Remember the time you went to visit a small store to buy some groceries, he probably would have used you to 'UPI krdo?'. Why? Because Merchant Discount Rate or MDR is charged to him if you would have paid via any card. Let us define this.

Merchant Discount Rate or MDR is the rate (processing fee) charged to a merchant (seller or the service providers) to assist the transactions made through the aggregator or payment service provided(PSP).

These charges can be:

  1. A percentage of a successful transaction amount (1.5% of ₹100)
  2. A flat fee of the transaction (₹10 per transaction)
  3. A mix of the above two (1.5% + ₹10)

These charges as proposed by the aggregator needs to be accepted by the merchant to enable the payment integration. These charges depend on:

  1. Type of the merchant (e-commerce, utility etc)
  2. Business model - B2B or B2C
  3. Size of the merchant
  4. Partner bank & aggregator's arrangement with other banks

There are three ways in which these charges are collected:

  1. Upfront deduction: Aggregator takes its cuts and GST before settling the transaction to the merchant.
  2. Surcharge: The aggregator charges and GST is added to the bill paid by the consumer.
  3. Invoicing: The aggregator invoices all the charge levied and sends it over to the merchant on a monthly basis.

MDR models

MDR models

But what if the PSPs charge 5% on every transaction and swim in a pool of money? They can't. RBI is smart enough to cap all these charges as per its guidelines. Refer to the official RBI document.

MDR as per RBI directions

MDR as per RBI directions

To promote digital payments, FM said no MDR charges will be applicable on these transactions from Jan 1 2020.

But that is not the only charges, is it? There are some more charges in the system levied to the other stakeholders in the whole system.

But before that let us set up the context once agin. In an transaction, there are three main pillars:

  1. Issuing bank through which the payment is made
  2. Acquiring bank to which the payment is to be transferred
  3. Issuing Institutions with card networks which facilitate the transaction(VISA, MasterCard)

Interchange fees: To process the transactions, issuing institutions like VISA collect this fee from the acquiring bank. This is usually comprised of a percentage of the total transaction plus some fixed amount. The average interchange rate for a credit card is around 1.81% and for debit cards, it’s 0.3%.

Switching fee: This is is fee levied by the card-issuing institution (VISA, Mastercard, AMEX etc.) levying a processing fee to card’s issuing bank (HDFC, AXIS, ICICI, SBI etc.). This fee can be called as the routing transaction fee between both the bodies and varies from 0.15% to 1.00%.

Resources: Razorpay, AuthNCapture