Union Cabinet has recently approved an incentive scheme to promote RuPay Debit cards and low-value BHIM-UPI transactions in the country.
What is Merchant Discount Rate?
- MDR is a fee charged for the merchants by the bank for accepting payments from customers through credit/debit cards/QR Code in their establishments.
- The merchant discount rate is expressed in percentage. This charge is in turn distributed among three stakeholders—customer's bank, merchant's bank and payment system operator (Visa, Mastercard, NPCI- RuPay or BharatQR).
Present MDR charges
| Sr. No | Merchant Category | Merchant Discount Rate (MDR) for debit card transactions (as a % of transaction value) | |
| Physical POS infrastructure | Digital POS | ||
| 1. | Small merchants | Not exceeding 0.40% | Not exceeding 0.30% |
| 2. | Special category of merchants | Not exceeding 0.40% | Not exceeding 0.30% |
| 3. | All other category of merchants (other than Government) | Not exceeding 0.95% | Not exceeding 0.85% |
| 4. | Government Transactions | Flat fee of INR 5 for transaction value INR 1 to lNR1000Flat fee of INR 10 for transaction value INR 1001 to INR 2000MDR not exceeding 0.50% for transaction value above INR 2001 with cap of INR 250 per transaction | |
Government's initiative
- In December 2019, the Government decided to waive off MDR charges on transactions done through RuPay and BHIM-UPI payments to push digital payments. This came into effect from Jan 1, 2020.
Impact of zero MDR on RuPay and BHIM-UPI payments
- Positives: Bring down cost of digital payments done through RuPay and BHIM-UPI; Encourage adoption of indigenously developed payment tools; Promote Cashless economy; Nudge other payment operators such as Visa, Mastercard to bringdown their commission etc.
- Negatives:
- Loss to NPCI which has developed RuPay and BHIM-UPI
- Banks lose out on MDR on RuPay and BHIM-UPI transactions and hence shift to other payment service providers such as Visa, Mastercard to earn commission on digital payments.
- Number of fintech companies such as Paytm, Googlepay etc. have integrated UPI into their apps for facilitating digital payments. The waiver on MDR charges through UPI would lead to reduced profits, discourage innovation and hurt the fintech sector. Zero MDR charges would thus prevent growth of Fintech companies which in the long run could hurt the digital payments ecosystem.
Details about the new scheme
- Rationale: Compensate the Banks for the loss of Zero MDR on RuPay and BHIM-UPI.
- Applicability: RuPay Debit cards and low value [up to Rs. 2,000) BHIM-UPI transactions.
- Benefit: Incentivise the Banks to build robust infrastructure for Digital payments