Digital payments is getting wholehearted support from the government and the RBI these days to encourage cashless economy. A decisive component of this policy is to develop digital payment facilities or infrastructure to settle transactions.
An ecosystem of electronic payment infrastructure of electronic/alternate payment mechanisms, card payments is in the development stage in the country now. Card payments include payments made using debit cards, credit cards or prepaid / stored value cards. These cards are supposed to replace cash especially for low value transactions.
To facilitate digital transactions, the Merchants have to set payment infrastructure like PoS (Point of Sale) machines and they have to start a unique account which is called the Merchant Account with a bank to avail payments from the customers. As the banks provides payment services, the merchants have to give a payment to the bank for using the payment infrastructure set up by the bank. This payment is called Merchant Discount Rate (MDR).
What is Merchant Discount Rate?
It is a charge to a merchant by a bank for accepting payment from their customers in credit and debit cards every time a card is used for payments (like swiping) in their stores. The merchant discount rate is expressed in percentage of the transaction amount.
MDR Policy by the RBI
For the time being, the objective of the RBI is to encourage maximum cashless transaction. Aiming this objective, the RBI has brought a policy of setting upper limit for MDR by banks. Here, the Reserve Bank had rationalized the Merchant Discount Rate (MDR) for debit cards with effect from September 2012.
Since then, the MDR for debit card transaction has been capped at 0.75% for transaction values upto Rs.2000 and at 1% for transaction values above Rs.2000.