After demonetization, cashless transactions really took off in India. PM Narendra Modi is keen to sustain the momentum of digital transactions and wants to boost digital payments in the Country. The Government has decided to bear the Merchant Discount Rate (MDR) charges for digital transactions up to Rs 2,000, which have been made through debit cards, BHIM, UPI or Aadhaar Pay for a period of 2 years.
So what is the merchant discount rate or MDR? A bank charges a merchant for accepting payments from you and other customers through credit and debit cards. Every time you or any customer swipes a debit/credit card for payments at the stores of the merchant, the merchant has to pay the MDR charges to the bank. MDR charges are expressed as a percentage of the transaction value.
The bank sets up the POS or Point of Sale terminal (Swiping Machine) at the merchants outlet and the MDR charges got from merchants, are divided between banks and network providers like Visa or MasterCard. The merchant has to bear the MDR charges himself. He cannot pass on these charges to you or other customers.
So what does the merchant do? He discourages you from paying by card. He insists on cash. All this could soon change in the New Year 2018.
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The Union Government will bear the Merchant Discount Rate (MDR) charges on debit cards, BHIM, UPI and Aadhaar Enabled Payment Systems for a period of 2 years, effective from 1st January 2018, by reimbursing these amounts to banks. This is for transactions up to and including a value of Rs 2,000.
Banks put up the POS (Point of Sale) terminals at merchant outlets (retail stores), so that merchants can accept payments from you and other customers via debit/credit cards. Banks charge the merchants for offering this facility. The charges are called merchant discount rates (MDR), which are shared between banks and network providers.
Simply speaking....every time you swipe your debit/credit card at POS (Swipe Machine) at the merchant outlet, the merchant has to pay MDR charges to banks as a percentage of the amount transacted.
As the merchant bears this cost (he cannot pass it on to the customer), he is reluctant to accept card payments. He insists on cash which defeats the purpose of going cashless.
Don't you think merchants will readily accept card payments if Government bears MDR charges?
Take a look at this, There are nearly 27-28 Crore transactions a month on POS machines, with an average size of Rs 1,500. This shows that majority of digital transactions take place in the small category, around Rs 1000 - 2000. In terms of volume, this is a whopping 65%.
So what have you learned? Most of the digital transactions by volume are in the range of Rs 1000-2000. Now, small merchants who do not get input tax credit through GST, are reluctant to accept card payments and bear MDR charges.
Would it not be smart for the Government to bear MDR charges for transactions only up to Rs 2,000? Volume of digital transactions under Rs 2,000 is huge and if the Government bears the MDR charges, it would be a relief to small merchants. The larger merchants who enjoy input tax credit under GST, have no need for subsidies.
After demonetization, the RBI wanted to promote cashless transactions. So it capped the MDR rate at 0.25% of transaction value, for transactions up to Rs 1,000 and 0.5% for transactions between Rs 1000-2000. The Government will now reimburse banks the MDR charges, for transactions up to Rs 2,000 for 2 years. The Government would have to reimburse around Rs 1,050 Crores in FY 2018-19 and Rs 1,462 Crores in FY 2019-20. By bearing these amounts, the Government can easily promote cashless transactions in India. Be Wise, Get Rich.
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