Previous Year Question
Which of the following best describes the term ‘Merchant Discount Rate’ sometimes seen in news?
The incentive given by a bank to a merchant for accepting payments through debit cards for financial transactions for purchasing goods and services
The amount paid by banks to their customers when they pay by debit cards for financial transactions for purchasing goods and services
The charge to a merchant by a bank for accepting payments from his customers through the bank’s debit card
The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Sale machines and debit cards
Correct Answer: C
Detailed Solution
The Merchant Discount Rate, or MDR, is the fee imposed when a commercial establishment accepts a card-based payment. It is also referred to as the Merchant Discount Ratio.
When a customer makes a payment to a merchant using a debit card, the merchant does not ordinarily receive the entire amount paid by the customer. The prescribed charge for accepting and processing the payment is deducted, and the remaining amount is credited to the merchant’s account.
The MDR proceeds may be distributed among institutions participating in the payment arrangement, such as:
the Acquiring Bank that provides the payment-acceptance facility to the merchant;
the Issuing Bank that issued the card to the customer;
the Card Network or relevant Payment System Operator; and
other authorised entities involved in processing the transaction.
MDR helps meet the costs associated with payment-acceptance infrastructure, network connectivity, processing, settlement, security and fraud management.
Option (a) is incorrect because MDR is not an incentive paid by a bank to a merchant. It is a charge imposed on the merchant.
Option (b) is incorrect because it is not an amount paid by banks to customers. Cashback or reward benefits are separate arrangements and do not constitute MDR.
Option (d) is incorrect because a Government incentive or subsidy for promoting digital payments does not define MDR.
The RBI and the Government have, at different times, prescribed MDR ceilings or zero-MDR arrangements based on the card category, merchant turnover and payment channel. Such policy changes do not alter the underlying meaning of MDR.