The government is reportedly considering the reintroduction of Merchant Discount Rate (MDR) charges, particularly for large merchants, to ease the financial burden on payment service providers and support the long-term viability of India’s digital payments ecosystem.The Payments Council of India (PCI) has asked the Prime Minister’s Office to reconsider the zero MDR policy on Unified Payments Interface (UPI) and RuPay debit card transactions.
Given all this, let’s take a look at what MDR is, who stands to benefit, and what the industry is hoping for.
What is MDR?Merchant Discount Rate (MDR) is a fee paid by merchants to banks or payment service providers every time a customer makes a digital payment, like with a debit/credit card or UPI.Who gets the MDR fee?The MDR is shared among three main players in a payment transaction:Issuer Bank (Cardholder’s Bank):
The bank that issued the customer’s card or UPI service.
It covers the costs of issuing cards/UPI accounts and handling payments.
Acquirer Bank (Merchant’s Bank/Payment Processor):
The bank or payment service provider that enables merchants to accept payments.
Provides payment solutions, terminals, and payment gateways.
Payment Network/Network Provider (Card/UPI Network):
The payment network facilitating the transaction (e.g., Visa, MasterCard, RuPay, NPCI for UPI).
Ensures smooth, secure, and fast transactions.
Breakdown Example:If the MDR is 2% on a ₹1,000 transaction:Issuer Bank: 1% (₹10)
Acquirer Bank/Payment Processor: 0.8% (₹8)
Payment Network (Visa/Mastercard, etc): 0.2% (₹2)
How does MDR work with card payments?
Step 1: A customer makes a payment of ₹1,000 using a card.
Step 2: The payment processor verifies and completes the transaction.
Step 3: The merchant receives ₹980 (₹1,000 minus 2% MDR).
Step 4: The remaining ₹20 is split between the issuer bank, acquirer bank, and network.
Current MDR regime for card & UPI payments:Card Payments (Debit/Credit Cards):
MDR typically ranges from 0.9% (non-Rupay debit cards) to 2% (credit cards) of the transaction value.
Fee is shared between banks, card networks (Visa/Mastercard etc), and payment processors.
MDR on RuPay debit cards is zero
UPI Payments (Digital Payments in India):Zero MDR for UPI has been in effect since January 2020. For transactions using UPI, MDR is zero due to government mandates to promote digital payments.To promote low-value UPI transactions and boost digital payments, the government announced an incentive scheme in March 2019. Under this scheme, the government offers a 0.15% incentive per transaction for payments below ₹2,000. This incentive is shared among the customer’s bank (issuer bank), merchant’s bank (acquirer bank), payment service providers and app providers.What the Industry WantsThe government allocated ₹1,500 crore as a UPI subsidy in the 2024-25 Budget to support the payments ecosystem, whereas the industry estimates the annual cost of maintaining and scaling the UPI ecosystem at ₹10,000 crore.
The industry proposes the introduction of an MDR for RuPay debit cards across all merchants.
It also suggests an MDR of 0.3% on UPI transactions for large merchants with an annual turnover exceeding ₹20 lakh.
Small merchants with an annual turnover below ₹20 lakh can continue to operate with zero MDR.
Approximately 6 crore merchants in India accept digital payments.
90% of these merchants fall under the small merchant category as per the RBI definition (annual turnover below ₹20 lakh).
Only 50 lakh merchants out of the 6 crore total are classified as large enterprises and would be subject to MDR if the proposal is implemented.
Who stands to benefit from MDR on UPI?If an MDR on UPI transactions is introduced for large merchants, the key beneficiaries would be:
Banks (Issuers and Acquirers): Additional revenue from UPI transactions.
Payment Service Providers (e.g., Paytm, PhonePe, Google Pay): Increased earnings for facilitating transactions.
NPCI (UPI Network): Enhanced funding to strengthen UPI infrastructure.
Impact on Merchants and Consumers
Small Merchants: Expected to remain MDR-free to encourage digital adoption.
Large Merchants: May absorb the cost or pass it on to consumers.
Consumers: Unlikely to face direct impact, though minor price adjustments could occur if large merchants transfer the cost.
Also read: 11 frequently asked questions about sovereign gold bondsFirst Published: Apr 3, 2025 7:48 AM IST
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