Explainer: What is MDR and why are merchants not happy with it?

In a bid to push digital payments, the Reserve Bank of India (RBI) said they will rationalise the framework for the merchant discount rate (MDR) applicable on debit card transactions.

On December 6, RBI lowered MDR to 0.4 percent for businesses with turnover of less than Rs 20 lakh. For businesses over Rs 20 lakh, MDR is capped at 0.9 percent.

Currently, merchants have to pay a blanket MDR of 0.75 percent for card transactions up to Rs 2,000 and 1.0 percent for transactions higher than that.

While the revised norms augur well for consumers as they will have to pay less on card payments, for merchants it means increased costs of operation. Retailers and traders' organisations like CAIT (Confederation of All India Traders) plan to approach the government and RBI regarding the issue.

Here’s all you need to know about MDR:

What exactly is MDR?

MDR is an acronym for merchant discount rate. It is the commission the bank and the card issuer share between themselves. Thus, if the MDR is 0.5 percent, this amount will be shared between the bank and the card issuer (such as VISA, Mastercard, AMEX, and such).

What has the RBI done?

The RBI has raised the MDR from average of 0.5 to 0.9 percent. This must be seen in the context of two developments. First, RBI has entered the picture only now. Second, it was earlier presumed that NPCI (National Payments Corporation of India) would fix the MDR. Now, it is clear that RBI has taken over this job.

Why are merchants protesting?

The merchants do not like the high discount rate. Typically, the customer does not pay the MDR. This is paid by the seller, not the buyer. So when the rates are increased on e-payments, the merchant (seller) loses that much more money.

Are the merchants justified in their protests?

Yes and no. In some cases the merchants have managed to make the customer pay. Like the MCGM, or the IRCTC. At the local store level, customers are told orally there will be an additional levy of 2.5 percent if they use a card. But, by and large, merchants will have to pay more.

What could be a middle path to resolving this impasse?

First, get a regulator in place to take care of deviants like MCGM, which does not even mention the charge on its receipt. Then work out a way where the rates could be standardised in consultation with the merchants. Today, the RBI discusses the rates only with the card players (Mastercard, VISA) and the banks. It does not consult trade associations. Since the card issuer brings the customer to a place where he can transact easily, he deserves a commission or MDR. How much this should be is open to discussion.