How merchant discount rates impact your business
How merchant discount rates impact your business
Merchant Discount Rate (MDR) is charged by banks and financial institutions on debit card and credit card transactions to businesses for payment processing services. It is inclusive of all the charges and taxes required to be paid by the retailers for leveraging a bank's payments infrastructure. The vendors are expected to arrange the necessary set up such as a Point-of-Sale terminal (POS) terminal to enable the payment services. A POS terminal is an electronic device used to swipe debit and credit cards to process payments. These charges add to the overall cost hence it is important for businesses to know the impact of these charges. Let’s understand various facts of the MDR and how it might affect your business.
The rates will vary depending on the following factors:
* Size of your company
* Type of the card used for the transaction
* Amount of the transaction
Who bears the cost?
Banks usually charge anywhere between 1% to 3% on every transaction made using a POS terminal. When your customer swipes the card, and transactions are completed, the bank will charge you a certain percentage of the transaction as an MDR. Later, this fee is actually shared amongst the card’s issuer, payments platform, and POS terminal provider.
Role of payment processors
The business operations are dynamic and POS infrastructure eases the payment-related complexities. However, keeping a track of various fees, exact charges, and payment schedules can be a hassle and can get businesses into legal trouble for non-payment. Therefore, most retailers choose to opt for a payment processor that acts as a mediator. These mediators are a perfect bridge between retailers and financial institutions. These payment processors can manage a myriad of functions such as paying the retailers on time, enabling the transfer of funds, providing POS infrastructure, offering robust security, adhering to Payment Card Industry (PCI) standards, and more.
PCI compliance and its impact on your business
Payment Card Industry Data Security Standard (PCI DSS) is a set of standard rules and regulations that vendors must follow when handling card payments. So, if your business processes card payments, it is mandatory to meet PCI DSS. Vendors that are not PCI compliant will attract unnecessary fees, fines, and some legal trouble too which can threaten the business sustainability. Keeping a record and a following number of compliances may not be feasible hence it is best to approach the payment processor to ensure a seamless experience. Also, these PCI standards keep changing, and hence it is important that your payment processor efficiently tracks down these updates.
Role of the vendor’s bank
The retailer’s bank maintains the account that accepts the credit card payments. Many times, the payment processors act like merchant’s banks too. For the ease of transactions and unlocking flawless services, vendors approach banks to be the payment processors.
Role of an issuer
When the end customers make the payment through cards using a POS terminal or other online payment gateway, the bank that issues the card i.e., the cardholder’s bank is responsible to pay the merchant’s bank, eventually paying the merchant.
Impact of MDR on business
When MDR was first introduced, vendors often passed on the MDR charges to the end customers. In turn, to avoid unnecessary costs, the customers opted for cash transactions. Later, to drive cashless transactions banks increased the number of POS terminals down to the last mile by including the small merchants based in remote locations too. This didn’t encourage retailers or end customers to opt for cashless transactions using the POS terminal. To change this reluctance, RBI tweaked the rules. Now, issuing banks are required to charge higher MDR to larger companies and lower MDR to small vendors.
The new rules laid down by RBI do not allow merchants to force the customers to pay the MDR instead they have to be borne by merchants. The MDR charges may prove to be expensive for transactions with a smaller amount and MDR charges will come at affordable costs for transactions involving a bigger amount.
The small vendors cannot be charged above 0.4% for transactions up to INR 200 for processing the payment through POS or digital platform. And for QR-code based transactions, MDR is 0.3% for transactions up to INR 200.
For larger vendors, the banks can levy up to 0.9% MDR for the POS transaction with a maximum value of INR 1,000, and QR-code based transactions will attract 0.8% MDR for the transaction of up to INR 1,000.
* Interesting fact
Did you know that 55% of the credit transactions happen online, 40% are online transactions and 5% are carried out by the small vendor with a turnover of up to 20 lakhs?
Recently, the National Payments Corporation of India (NPCI) in association with several banks has agreed to charge 2% MDR for UPI-RuPay credit cards. The good news for the small retailers with a turnover of not more than INR 20 lakh is that they will be exempt from the MDR charges. Out of the 2%, 1.5% will be shared by the card issuing bank, and 0.5 will be split between the RuPay network and the acquiring entity.
Also, back in December 2021, the Union Cabinet announced a relief package of INR 1,300 crore. Network providers such as MasterCard, lead the technological development of the digital payment landscape. Therefore, this package brought a great relief which in turn strengthened the payment processing infrastructure.
So, this is how MDR will impact your overall business and you must consider all the charges, compliance standards, fines, and other related factors. If you find it challenging to manage the payments you can always opt for payment processors that can take your business to great heights. For more information, you can visit our website or connect with us.