Data PrivacyAn overview of merchant Discount rate Charges

INTRODUCTION

In the dynamic realm of financial transactions, where digital payments have become the norm, the concept of Merchant Discount Rate (hereinafter referred to as “MDR”) charges stands as a cornerstone of the payment ecosystem. MDR charges play a pivotal role in the world of payment processing, influencing businesses, consumers, and financial institutions alike.

As per the Reserve Bank of India (hereinafter referred to as “RBI”) Discussion Paper on Charges in Payment Systems released on 17^th Aug, 2022 “MDR Charges is the charge recovered by the acquirer from the final recipient of money (i.e., merchant). It is levied as a discount to the transaction amount and usually recovered during the settlement of the payment transaction. It is the most preferred way of recovering costs incurred in a merchant payment system.”

The legal consequences associated with MDR charges can have a notable impact on businesses. MDR charges constitute payments that merchants and businesses are obligated to pay to payment processing firms for debit or credit card transactions. Encompassing diverse fees linked to card payment processing, these charges can influence the overall profitability and financial well-being of businesses. It is essential for businesses to comprehend the legal dimensions of MDR charges to ensure adherence to regulations and proficiently handle their financial responsibilities.

WHAT ARE MDR CHARGES?

MDR represents the percentage at which the merchant, incurs charges for accepting payments through Debit Cards, Credit Cards, and transactions made via net banking and digital wallets. Typically, merchants must accept the rate determined by the payment service provider and establish the necessary infrastructure before enabling digital payment acceptance.

Another name for MDR Charges is Transaction Discount Rate (hereinafter referred to as “TDR”) or discount rate. It can also compromise of interchange fees, miscellaneous fees (i.e., cross-border fees, zero-limit fees, etc.), gateway and point-of-sale fees, and assessment fees. In general, MDR charges range from 2-3% of the transaction value.

For example, if a customer makes a ₹10,000 purchase using a credit card, the merchant would be required to pay ₹200 based on a 2% MDR charge to facilitate the payment. However, the business owner has the opportunity to negotiate with a payment provider regarding the specific MDR charges before agreeing to their services. The negotiation stance can be founded on the total transaction value the business owner anticipates from their customers.

HOW MDR WORKS?

As mentioned hereinabove, MDR is like a fee that businesses pay when they accept card payments. This fee is usually a percentage of the total amount of each transaction.

The exact percentage that the business pays depends on a few things:

1. How much business is processed i.e., the number of transactions?

2. The type of card the customer uses i.e., debit or credit.

3. The average amount of money spent in each transaction.

The main part of this fee is known as interchange fees. These are fees that go to the banks or companies that issued the cards. So, the MDR is kind of like a small cut that businesses give to cover the costs of processing card transactions.

Let us understand the working of MDR with the help of an example:

A consumer purchases goods from grocery or retail shop (merchant) and pays for the goods using a credit or debit card. Merchant uses a Point-of-Sale (herein after referred to as “POS”) device to facilitate payment and the Merchant bank charges a fee i.e., MDR.

The MDR fee that a merchant pays isn’t kept entirely by the bank where the business has its account. It’s divided among different parties involved in the card transaction process as below:

i. Issuing Bank (Customer’s Bank): This is the bank that issued the credit or debit card to the customer. A portion of the MDR goes to this bank.

ii. Payment Network (Visa, Mastercard, etc.): The major credit card companies (like Visa, Mastercard) operate the payment networks that facilitate transactions. They get a share of the MDR as well.

iii. Merchant Bank (Acquiring Bank): The bank where the merchant has its account takes a part of the MDR as its fee. This is the bank that provides the Point of Sale (POS) terminal or device.

RBI NOTIFICATION

RBI’s notification on “Rationalisation of Merchant Discount Rate (MDR) for Debit Card Transactions” bearing reference no. RBI/2017-18/105 DPSS.CO.PD No. 1633/02.14.003/2017-18, issued on 06^th December, 2017 enumerates the MDR charges on debit card and credit card transactions.  The consultations with stakeholders which was based on the “Draft Circular – Rationalisation of MDR for Debit Card Transactions” has  taken into consideration the two essential  objectives namely:

a. Promoting Debit Card Acceptance: Encouraging more businesses, especially small ones, to accept debit card payments.

b. Ensuring Business Sustainability: Making sure that the companies and entities involved in these transactions can continue to operate successfully.

• The decision is to rationalize or streamline and make more logical the MDR for debit cards. This rationalization will be based on specific criteria, which are:
• Categorisation of merchants on the basis of turnover.
• Adoption of a differentiated MDR for QR-code based transactions.
• Specifying a ceiling on the maximum permissible MDR for both ‘card present’ and ‘card not present’ transactions.
• The aim is to strike a balance that benefits both the merchants and the entities in the transaction process, creating a fair and sustainable system.
• Accordingly, the maximum MDR for debit card transactions shall be as under:

UNDERSTANDING THE LATEST NPCI CIRCULAR ON WALLET INTEROPERABILITY WITH UPI

The National Payments Corporation of India (hereinafter referred to as “NPCI”) announced Wallet Interoperability Guidelines (hereinafter referred to as “Guidelines”) on 24^th March, 2023. The Guidelines has been issued to establish a standardized interchange fee for transactions involving wallets Prepaid Payment Instruments (hereinafter referred to as “PPI”) when they are connected to the UPI network and interoperability is enabled. This implies a regulatory effort to streamline and regulate the fees associated with wallet transactions on the UPI platform.

The interchange fee, a charge paid by the acquirer to the PPI issuer, has no direct impact on either the merchant or the consumer. In the process of a wallet user making a payment, the interchange fee is paid by the merchant acquirer to the wallet issuer. It remains undecided whether the acquirer will transfer this fee to the merchant.

Notably, the interchange fee, capped at 1.1%, is applicable solely to transactions exceeding ₹2,000 and involves online merchants and large retailers. However, this fee does not extend to peer-to-peer (hereinafter referred to as “P2P”) payments and small businesses within the P2P category.

The Government of India, effective January 01, 2020, has implemented a zero-charge framework for Unified Payments Interface (hereinafter referred to as “UPI”) transactions, rendering charges null for both users and merchants. This was established through an amendment to the Payment and Settlement Systems Act, 2007, which specifically sets the MDR for UPI transactions at zero, ensuring a cost-free UPI experience for users and merchants alike.

REVOLUTIONIZING TRANSACTION COSTS: PAYTM’S MDR OFFERINGS AT A GLANCE

0% MDR on UPI Transactions

In India, the landscape of payment gateways is characterized by easy integration and versatile payment options. A pivotal factor influencing business decisions in this realm is the MDR. When businesses utilize payment gateways to conduct transactions, they incur fees known as MDR, which is essentially the cost associated with facilitating the transaction process.

Paytm payment gateway distinguishes itself by providing top-notch financial services and stands out from other payment gateways by allowing acceptance of UPI and RuPay Debit card payments without any associated costs for existing merchants.

Thus, the Paytm payment gateway facilitates the acceptance of UPI and Rupay Debit Card payments for existing merchants at no cost, while other payment gateways impose a 2% charge as MDR fees. Unlike Paytm, these other payment gateways have adhered to the guidelines of Meity, leading to a widespread uproar against Paytm.

1% MDR Fee on Wallet – Introduction of  ₹ 100 Crore Loyalty Program for Kirana Stores to Offset Merchant Fees

Paytm alleged that the implementation of a 1% fee for business, inclusive of 18% GST, on wallet payments received, was effective from May 4, 2020. The 1% MDR applies within the existing Paytm limits. However, no charges will be levied for merchants receiving payments directly into their bank accounts through UPI.

The aim of the new loyalty program is to make sure that accepting digital payments is a beneficial experience for Kirana stores, for which Paytm has set aside Rs.100 Crore.

Top of Form

MDR CHARGES FOR DIFFERENT PAYMENT SYSTEMS: A COMPARATIVE STUDY

a. UPI Transactions: Presently, merchants (involved in P2M transactions) and payment originators (engaged in P2P transactions) do not incur any charges for UPI.

b. Debit Cards: The RBI has prescribed the MDR charges for small merchants, setting a maximum limit of INR 200 per transaction. The prescribed rates are not to surpass 0.4% for physical PoS machines and online modes, and 0.3% for QR-based payments. Meanwhile, for large merchants, the MDR upper cap per transaction is INR 1,000, with the stipulation that it should not exceed 0.9% for physical PoS machines and online modes, and 0.8% for QR-based payments.

c. RuPay Debit Cards: At present, RuPay debit card transactions carry no MDR charges. In December 2021, the Ministry of Electronics and Information Technology, Government of India, introduced an incentive scheme of around INR 1,300 crore. Under this initiative, acquiring banks are being incentivized to handle RuPay debit card transactions (P2M) and UPI transactions (P2M, with a transaction value up to INR 2,000) with zero MDR.

 b. Credit Cards: At present, the MDR for credit cards is overseen by Payment Service Providers (hereinafter referred to as “PSOs”). MDR for credit cards exhibits variation among different business categories, where low-risk sectors such as education, utilities, and government payments tend to have a lower MDR. Conversely, high-risk business categories like e-commerce and donations generally incur a higher MDR. Typically, the MDR spans from 0.7% for low-risk categories to 2.2% for high-risk categories. This disparity in MDR is often attributed to the differential interchange cost, determined by the card schemes (such as Visa, MasterCard, NPCI, etc.), based on the credit-risk cost.

AMLEGALS REMARKS

India’s digital payments landscape is experiencing rapid expansion, underscoring the collaborative efforts of various stakeholders within the industry. The country stands out as a leader in digital payment adoption, boasting advanced infrastructure to facilitate these transactions.

Despite this progress, there is room for growth, as the rate of account ownership at financial institutions or mobile money service providers in India currently stands at 77.53%. This highlights the potential for further inclusion and accessibility, emphasizing the need for continued efforts to reach a broader population and enhance financial services for all.

The dynamic interplay between technological advancement and the pursuit of financial inclusivity defines India’s evolving digital payments ecosystem.

When it comes to the fees charged in the digital payments system, it is crucial to find a middle ground. If the charges are too high, it might discourage businesses and customers from using digital payments. On the other hand, if the fees are too low, the companies involved might lose money, making it hard for them to continue offering these services.

Striking the right balance is important like keeping fees reasonable enough to encourage digital payments while ensuring that the companies providing these services can sustain themselves financially. It is about making digital payments attractive and convenient for everyone without affecting the businesses and revenue of the users.

-Team AMLEGALS assisted by Ms. Prishita Saraiwala (Intern)

For any query or feedback, please feel free to get in touch with mridusha.guha@amlegals.com or liza.vanjani@amlegals.com.