February 22, 2025 · 12 mins read
Santosh Kumar
Merchant discount rate (MDR) is a charge paid by merchants to banks and payment service providers for every transaction by giving them the infrastructure to accept digital payments during a transaction. The cost is shared by the acquirer bank, the bank whose customer made the payment, and the card network providers such as Visa, MasterCard, and RuPay. It is applicable to peer-to-merchant payments or commercial transactions. Starting on January 1 2020, the Union finance ministry scrapped MDR for all RuPay and UPI transactions, even as banks were allowed to impose the cost using other card payment networks.
The merchant discount rate is a bank fee charged to a merchant for taking payment from their customers through credit and debit cards for goods or services. The bank can lower the rate as merchants' sales increase. Merchants generally pay a 1% to 3% fee for processing payments for each transaction.
When consumers procure a merchant's goods or services and pay with their debit or credit card, they can use a point-of-sale (POS) device at the merchant's physical location. The merchant bank charges a fee (MDR). The MDR fee collected by the merchant bank is then split between the bank that issued the credit card, the payment network (Visa, Mastercard, etc.), and the bank that provided the POS terminal or device.
The Union finance ministry then said that from January 1, 2020, businesses with an annual turnover of more than ₹50 crore will have to offer low-cost digital payment options to customers. MDR is not levied on either customers or merchants to boost digital payment in India.
The payments industry says it negatively impacts their revenue and affects small startups and fintech companies, as banks are not able to pay for their services. Banks are also not investing in additional infrastructure to support the smooth flow of digital payments. For this reason, these companies are asking to be compensated for the infrastructure.
The Union cabinet approved an incentive scheme worth Rs 1,300 crore for 2022-23 in December 2021 to promote RuPay debit cards and low-value Unified Payments Interface (UPI) transactions up to Rs 2,000 by reimbursing the merchant discount rate (MDR) to banks, which was brought down to zero in December 2019.
MDRs are typically displayed as a single percentage, but this amount is actually comprised of multiple fees, including:
Interchange Fee: This is set by the card networks (Visa, Mastercard, Amex, Discover) and charged by the issuing bank to the acquiring bank.
Assessment Fee: This is set by the credit card network for using its network and billed as a percentage of total monthly volume.
Markup Fee: This fee is set by the processor and paid by the merchant, typically on a per-transaction basis, for all credit and debit cards processed by the provider. The acquiring bank (aka the merchant’s bank that processes the transaction) takes the discount rate paid by the merchants, pays the interchange and assessments to the respective payment networks and card issuing banks, and then pockets the rest.
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A payment aggregator is a service provider that enables merchants to facilitate digital or e-commerce transactions. It allows merchants to accept credit and debit card payments without creating a merchant account with a bank.
Interchange fees are charges set by the card associations for each form of card transaction.
A merchant processor is a company assigned by a merchant to process transactions from different channels, such as cards, for merchant-acquiring banks.
Charges are made to merchants or cardholders based on their debit or credit card usage. Visa, Mastercard, and Discover each set a minimum, fixed-rate percentage that is paid against the sum of monthly purchases processed with a credit or debit card.
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The POS terminal is a device used for handling credit and debit card payments at merchant outlets.
MDR mechanisms serve the following purposes
1: Provide revenue to banks and gateways to manage payment networks
2: Maintain security and efficiency of digital payment systems
3: Cover risks and charges involved in digital transactions
4: Promote cashless transactions among merchants/customers
5: Bring standardization and uniformity in fee structures
6: Enable access to payment acceptance infrastructure easily
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Nowadays, UPI got huge success, and most of the translations are done through itself; Union cabinet chaired by Prime Minister Narendra Modi approved an incentive scheme worth 1300 cr for 2022–23 to promote rupay debit cards and low-value UPI transactions up to RS 2000 by reimbursing the MDR to banks, The objective is to keep these transactions free largely most public sector banks issue Rupay debit cards, in that sense the impact on visa and MasterCard will be minimal because they have a sizeable market share among private banks & in the credit card segment.
It stops a vital revenue flow to banks and payment service providers, having them without the incentive to remain invested, continue upgrading networks for seamless transitions, or support the government's digital push
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Positives: Lower the cost of digital payments made through UPI; encourage the adoption of indigenously developed payment tools; promote a Cashless economy; nudge other payment operators such as Visa and Mastercard to lower their commission, etc.
Negatives: Banks lose out on MDR on UPI transactions and shift to other payment service providers, such as Visa and Mastercard, to earn commission on digital payments.
A number of fintech companies, such as Paytm, Google Pay, etc., have integrated UPI into their apps to facilitate digital payments. Waiving MDR charges through UPI would reduce profits, discourage innovation, and hurt the fintech sector. Zero MDR charges would thus prevent the growth of Fintech companies, which in the long run could hurt the digital payments ecosystem.
Merchant Category: Small merchants
Physical POS infrastructure: Not exceeding 0.40%
Digital POS: Not exceeding 0.30%
Merchant Category: Special category of merchants
Physical POS infrastructure: Not exceeding 0.40%
Digital POS: Not exceeding 0.30%
Merchant Category: All other categories of merchants (other than government)
Physical POS infrastructure: Not exceeding 0.95%
Digital POS: Not exceeding 0.85%
Merchant Category: Government Transactions
Physical POS infrastructure + Digital POS: Flat fee of INR 5 for transaction values INR 1 to lNR1000Flat fee of INR 10 for transaction values INR 1001 to INR 2000MDR not exceeding 0.50% for transaction values above INR 2001 with a cap of INR 250 per transaction
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When MDR was first applied, the merchants passed it on to the customers, which increased the number of cash payments as customers tried to avoid extra charges.
To promote cashless transactions, issuing banks had to increase the number of cards and PoS terminals in circulation, so they actively worked to get more merchants to install the terminals.
But this alone didn't bring about the expected change. First, issuing banks faced several challenges in getting small merchants to install PoS machines—for instance, one major challenge was that card payments entailed extra costs for merchants compared to cash transactions. Second, banks were willing to increase PoS coverage only if the MDR share was profitable to them.
In a bid to address these issues, the RBI has decided to allow issuing banks to charge large businesses a higher MDR fee while charging small businesses comparatively less.
Businesses with turnover of up to Rs. 20 lakhs in the previous year are considered small businesses. Small business owners will pay a maximum MDR of 0.4% of the bill value. Businesses with turnover greater than Rs. 20 lakhs in the previous year are considered medium and large businesses. Medium and large business owners will pay 0.9% of the bill value.
Also, the RBI has set an MDR limit of Rs. 200 per bill for small business owners and Rs. 1,000 for the others.
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A different set of rules is mandated for QR (Quick Response)—based payments. For small businesses, the MDR will be 0.3 percent or Rs. 200 per transaction, whichever is lower. For medium and large businesses, the MDR will be 0.8 percent or Rs. 1,000 per transaction, whichever is lower.
The government will charge MDR on transactions up to Rs. 2,000 made through debit cards, BHIM UPI, or Aadhaar-enabled payment systems.
Under the rules laid down by RBI, business owners cannot pass on the MDR charges to their customers. The MDR charges will be a tad expensive for transactions of lesser value. However, for transactions of higher value, they are not likely to be expensive.
Since the burden of MDR charges is no longer on the customers, we can expect more digital payments, thus including more people in the financial system and increasing digital finance.
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1: A low MDR rate for small enterprises decreases the expense of using PoS. Hence, the transition to digital payment tools is also quite simple.
2: Digital payments leave transparent records that allow businesses to keep proper financial documents and even fulfil all tax obligations.
3: A business can reach more customers because they now accept digital payments. Many customers, after all, prefer a cashless mode of payment.
4: Government initiatives like bearing MDR for small transactions encourage businesses to embrace cashless payments without additional costs.
5: For major commercial entities or large-ticket ones, the MDR costs will still be perceived as steep, but they are balanced by the efficiency of digital modes and patron preference.
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With the aim of supporting the digital economy and cashless society, the government announced certain measures in the budget session last year. Last year, the government decided not to impose MDR on merchants or consumers. You can find the statement made by Finance Minister Nirmala Sitharaman here: "…there are low-cost digital modes of payment such as BHIM UPI, UPI-QR Code, Aadhaar Pay, certain Debit cards, NEFT, RTGS etc. which can be used to promote less cash economy. I, therefore, propose that the business establishments with annual turnover more than 50 crore shall offer such low cost digital modes of payment to their customers and no charges or Merchant Discount Rate shall be imposed on customers as well as merchants."
If not the merchant, then who will bear the MDR cost? This was the answer given by the finance minister,
"RBI and Banks will absorb these costs from the savings that will accrue to them on account of handling less cash as people move to these digital modes of payment…Necessary amendments are being made in the Income Tax Act and the Payments and Settlement Systems Act, 2007, to give effect to these provisions.
"As you can see, the FM has categorically stated that changes will be made in the rules to support this major step of removing MDR rates for merchants. However, merchants and banks are of the view that removing MDR will hit their revenue stream as banks will have to pay the MDR amount. Also, merchants charging a fee from consumers to recover MDR rates will be at a disadvantage too.
The declaration of the Finance Minister of India, Nirmala Sitharaman, aims to encourage digital payments. It came into action on January 1 2020, which includes the following aspects:
Mandates offering low-cost digital payment options to customers for businesses with an annual turnover of over Rs. 50 crores.
These payment modes encompass options such as Debit Cards, BHIM UPI, UPI QR Code, NEFT, Aadhaar Pay, and RTGS.
At present, it is applicable only to online and QR-based transactions.
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Today's electronic payment networks offer customers the option to make purchases using various credit and debit cards. This is a convenience for consumers and an advantage for merchants who want to sell more goods. Merchants pay a fee for the services that make this possible. Consumers may also pay if the merchant builds that fee into the prices it charges.
What is the Merchant Discount Rate?
The MDR is a cost that banks and service providers charge retailers to process online payments. It is often applied to peer-to-peer merchant transactions and calculated as a percentage of transaction value.
What changes were made to MDR for UPI transactions starting January 1, 2020?
To promote digital payments, the finance minister cancelled MDR from all UPI payments. This means both customers and merchants are not charged for these transactions.
How is MDR structured?
Several fees combine MDR: the interchange fees established by card networks, assessment fees established by credit card networks, and markup fees set by payment processors. These costs usually appear as a single percentage.
What are the benefits of Zero MDR in UPI transactions?
Bring down the cost of digital payments made through UPI; encourage the adoption of indigenously developed payment tools; promote a Cashless economy; and nudge other payment operators such as Visa and Mastercard to lower their commissions, etc.
What are the potential downsides of eliminating MDR?
Banks lose out on MDR on UPI transactions and shift to other payment service providers, such as Visa and Mastercard, to earn commission on digital payments. Fintech companies like Paytm, GooglePay, etc., have integrated UPI into their apps to facilitate digital payments. Waiving MDR charges through UPI would lead to reduced profits, discourage innovation, and hurt the fintech sector. Zero MDR charges would thus prevent the growth of Fintech companies, which in the long run could hurt the digital payments ecosystem.
How does MDR affect small businesses in India?
Small businesses benefit from decreased MDR rates, making accepting digital payment transactions more reasonable. It increases customers and keeps better financial records.
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