If you’ve ever accepted credit or debit card payments, you’ve probably heard of merchant discount rate (MDR). MDR is a fee charged by banks or other financial institutions to businesses for processing card payments.
In the past few years, there has been a lot of talk about MDR and how it’s affecting businesses, especially small businesses. In this blog post, we will explore what MDR is, how it’s calculated, and how it affects businesses. We will also discuss the recent changes to MDR in India and how it will impact businesses there.
What is the Merchant Discount Rate?
The merchant discount rate (MDR) is the fee charged to a merchant by a card issuer for accepting credit and debit card payments. MDRs are typically expressed as a percentage of the transaction amount.
For example, if you run a small business and someone pays for their purchase using a credit card with a 2% MDR, you would pay the card issuer 2% of the total transaction value. MDRs are used by card issuers to offset the costs associated with processing card payments, including interchange fees charged by the card networks.
While MDRs may seem like a small expense, they can add up over time, particularly for businesses that process a large volume of credit and debit card transactions. For this reason, it’s important to understand how MDRs work and compare different rates before choosing a merchant account provider.
How does the Merchant Discount Rate Work?
The Merchant Discount Rate (MDR) is the fee charged to a merchant by a bank for accepting payments through digital means such as credit or debit cards. In simple terms, it is the commission charged by banks to merchants on card transactions. The MDR is decided and regulated by the Reserve Bank of India (RBI).
In India, the MDR was earlier fixed at 0.75% for debit card transactions and 1% for credit card transactions with a cap of ₹200 per transaction by the RBI. However, from January 1, 2020, the MDR has been revised and now ranges from 0.40% to 2% depending on the type of transaction and card used. For small businesses with an annual turnover of up to ₹20 lakhs, the MDR has been capped at 0.50%.
The merchant discount rate works by charging a fee on every card transaction that a merchant accepts. This fee is then divided between the bank that issued the card and the acquirer bank, which provides payment processing services to the merchant. The acquirer bank typically charges a higher MDR than what is charged by the issuer bank in order to make a profit on each transaction.
In order for a merchant to start accepting card payments, they must first sign up with an acquiring bank and set up a merchant account. Once their account is setup, they will be able to accept payments through various digital means such as credit or debit cards, UPI
What are the benefits of the Merchant dDiscount Rate?
When you accept payments through a merchant account, you are typically charged a fee per transaction. This fee is called the merchant discount rate (MDR). The MDR compensates the payment processor for the cost of processing the transaction and usually includes a percentage markup for profit.
The MDR can vary depending on many factors, including the type of card accepted, the size of your business, and the volume of transactions processed. For example, businesses that process a higher volume of transactions may be able to negotiate a lower MDR with their processor.
There are two main types of merchant discount rates: tiered and flat-rate pricing. Tiered pricing has three tiers—qualified, mid-qualified, and non-qualified—and your per-transaction fee will be based on which tier the card falls into. Flat-rate pricing means that you pay one simple percentage fee on every transaction, regardless of the card type.
The benefits of merchant discount rates are that they allow businesses to accept credit and debit cards without having to pay upfront costs or monthly fees. They also provide an easy way to budget for credit card acceptance costs.
What are the drawbacks of the Merchant Discount Rate?
There are a few drawbacks of the merchant discount rate. First, it can be expensive for merchants to accept. Second, it can be confusing for customers to understand what the merchant discount rate is and how it works. Finally, the merchant discount rate can incentivize merchants to offer discounts to customers who pay with cash or check, which can be unfair to those who use credit or debit cards.
How to compare Merchant Discount Rates
When you’re shopping around for a merchant account, one of the most important factors to compare is the merchant discount rate (MDR). This is the fee charged by the processor for each transaction, and it can vary widely from one provider to another.
To compare MDRs, you’ll need to know the average ticket size and transactions per month for your business. With that information, you can calculate the estimated monthly processing fees for each processor.
Here’s an example: let’s say your average ticket size is $100 and you process 500 transactions per month. Processor A has an MDR of 1.5% + $0.10, while Processor B has an MDR of 2.0% + $0.30.
Processor A would charge you $950 in monthly processing fees ($100 x 500 x 1.5% + $0.10), while Processor B would charge you $1,200 ($100 x 500 x 2.0% + $0.30). In this case, Processor A is the better choice because it has a lower MDR.
Of course, there are other factors to consider when choosing a merchant account provider, but the MDR should be one of your primary concerns. By doing some simple math, you can make sure you’re getting the best deal on credit card processing fees.
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