Page 24 - Banking Finance December 2022

ARTICLE

and services. The percentage of MDR charges is agreed
upon before the merchant agrees to the setting up and
utilisation of the services and hereafter, the charges are
applicable on the transactions made.

MDR charge may also comprise of switching fee and
interchange fees.
a) Switching Fee - Switching fee is the fee that the card-
issuing institution like, Visa, MasterCard etc. levies and
can be referred to as the routing transaction between
the parties. RuPay cards, as per government mandate,
are free of MDR charges as an initiative to boost the
home-grown institution expanding digital payment.
Apart from RuPay cards, UPI also doesn't attract any
MDR.

b) Interchange Fee - Interchange fees include the amount
collected by the issuing institution from the acquiring
bank. Generally, it consists of a percentage of the total
transaction amount and a fixed amount. This fee is
charged by the customer's bank from the merchant's
Is MDR Charge necessary?
bank to process digital transactions.
To sustain and nourish the continuity of payment
infrastructure, payment processing fees are crucial which
The merchant tries to pass on the MDR charges to the
are responsible for encouraging global e-commerce. With
customers which is called TDR. TDR Stands for Transaction
payment gateways and aggregators being involved in online
Discount Rate. This fee is charged by the merchants to their
transactions, MDR charges serve as a profit opportunity for
customers for making a payment through payment gateway
them. Eliminating MDR could potentially kill the industry,
provided by them for collecting funds. A TDR contains
leaving no motivation to expand the payment universe.
processing charges, bank charges, and taxes.
How aggregator collects charges?
How MDR charges are divided among
There are three commercial models in practice.
various entities involved?
Let's assume: PG Charge = 1%, GST = 18% (Financial
Services), Transaction Amount = 1000
1.25% - The issuing bank (the card 1. Upfront Deduction Model- Aggregator deducts the
holder bank) charges and GST amount before settling transaction
amount to merchant.
0.15%- Card networks (Visa,
Customer Pays = 1000, aggregator deducts = 11.80 and
Mastercard and other intermediaries)
merchant gets = 988.20
If 2.0% MDR
is collected 0.25%- The merchant account 2. Surcharge Model - Let us say merchant doesn't want
by the provider (Payment service provider) to bear the charges then who will?
payment The user, aggregator's charges + GST amount is passed
0.10%- Payment switch provider (Link
aggregator on to the user
between acquiring bank and card
networks) Customer pays = 1011.80, aggregator keeps =11.80 and
merchant gets = 1000
0.25%- The acquiring bank (Payment
3. Invoicing Model - Sometimes the model doesn't allow
service provider's bank)
to either deduct money upfront or surcharge to user.

24 | 2022 | DECEMBER | BANKING FINANCE