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MDR Decoded: How Merchant Discount Rate affects consumer behaviour and what retailers are saying

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In a bid to encourage electronic payments, the central government will reimburse the Merchant Discount Rate () applicable on transactions up to Rs 2,000 for the next two years.

Govt to bear MDR on transactions up to Rs 2,000; retailers hail the decision
In order to promote digital payments, the Reserve Bank of India has earlier come out with differentiated merchant discount rates (MDR) for debit card transactions, prescribing separate caps for small and large traders

According to the Minister of Electronics, IT and Law and Justice Ravi Shankar Prasad, the government will reimburse the MDR levied on transactions conducted via debit cards, BHIM UPI and Aadhaar enabled Payment System (AePS) on a transaction value of up to Rs 2,000 from January 1, 2018.

The decision to reimburse MDR to banks was taken by the Union Cabinet in its meeting held on Friday.

“The government today has taken a very major decision to accelerate digital payments in the country — MDR charges — of up to transactions worth Rs 2,000 shall now be reimbursed by the government,” Prasad said at a press conference after the Cabinet meeting.

Consequent to the decision, transactions less than Rs 2,000 in value will not bear any additional form of MDR.

The reimbursements are estimated to cost the state exchequer Rs 1,050 crore in FY2018-19 and Rs 1,462 crore in FY2019-20.

The decision also entails formation of a committee comprising of “Secretary Department of Financial Services, Secretary Ministry of Electronics and IT and the CEO, National Payment Corporation of India (NPCI)” to look into the industry cost structure of such transactions which will form the basis to determine the levels of reimbursement.

The Union Cabinet’s decision follows the December 6, 2017 norms issued by the Reserve Bank of India (RBI) which put a cap on MDR applicable on transactions conducted via debit cards from January 1, 2018.

What is MDR?

MDR on debit cards is the amount that a merchant has to pay to its service providers when a consumer swipes her card on the merchant’s point-of-sales (PoS) terminal. It is also applicable for online transactions and QR-based transactions.

The amount that the merchant pays for every transaction gets distributed among three stakeholders—the bank that enable the transaction, the vendor that installs the PoS machine and the card network provider such as Visa or MasterCard. The MDR on credit cards can range from nil to 2 percent of the transaction amount.

From 1 January 2018, the charge will be based on the categorisation of merchants on the basis of turnover. The two newly created categories are – small merchants with turnover up to Rs 20 lakh and other merchants with turnover above Rs 20 lakh.

Accordingly, cap on PoS (Point of Sales) was kept at Rs 1,000 per transaction or 0.90 per cent of the transaction value for “other merchants”, while that of Rs 200 or 0.40 per cent has been set for “small merchants”.

The MDR for QR code-based transaction has been capped at Rs 200 or 0.30 per cent for “small merchants” and Rs 1,000 or 0.80 per cent for “other merchants”.

How This Affects Consumer Behaviour

The revised MDR will turn out to be more expensive for merchants in case of small-value transactions. However, for higher-value transactions the cost will come down.

Although merchants are not supposed to pass on the MDR charge to the consumer, in most cases they do, saying that it eats into his margin. Due to this, consumers shift to cash payments despite owning debit cards.

Similarly, MDR is charged on payments made to merchants through BHIM UPI platform and AePS.

In order to promote digital payments, the Reserve Bank of India has earlier come out with differentiated merchant discount rates (MDR) for debit card transactions, prescribing separate caps for small and large traders.

This is how retailers reacted to the Govt’s decision on Twitter:-

Govt to bear MDR on transactions up to Rs 2,000; retailers hail the decision

Govt to bear MDR on transactions up to Rs 2,000; retailers hail the decision

Govt to bear MDR on transactions up to Rs 2,000; retailers hail the decision

(With inputs from IANS)