MDR 💳 vs UPI 🇮🇳

💪PhonePe manages 20% of global real-time payments.

How?

NPCI International Payments Ltd. (NIPL) CEO Ritesh Shukla said that UPI is processing 40% of global real-time payments.

and

PhonePe handles 50% of India’s UPI transactions.

That’s a massive scale at both volume and value levels.

The best part is that UPI is free even after it is made on top of IMPS, unlike Interchange fees for card payment processing, which charge literally a lot compared to 0.

This motivates both consumers and merchants to opt for UPI.

So, let’s see how it affects MDR-rich companies like Visa and Mastercard.

How do card-issuing companies make money via interchange fees?

Interchange fees are a type of fee that merchants pay to card-issuing companies whenever a customer uses a credit or debit card to make a purchase. These fees are charged to cover the costs of processing credit and debit card transactions, including fraud prevention, customer service, marketing and more.

The amount of the interchange fee varies depending on several factors, including the type of card, the type of transaction, and the merchant’s industry.

In general, interchange fees for credit cards are higher than interchange fees for debit cards. 🤑

These are a major source of revenue for card-issuing companies. In the United States, card-issuing companies collected an estimated $100B in interchange fees in 2019.

Here is a breakdown of how interchange fees are typically structured:

• Network fees: The card network (such as Visa or Mastercard) charges a fee to the merchant’s bank for processing the transaction. This fee is typically a percentage of the transaction amount.
• Merchant discount rate: The merchant’s bank charges a fee to the merchant for processing the transaction. This fee is typically a percentage of the transaction amount plus a flat fee.
• Interchange fee: The merchant’s bank pays a portion of the transaction amount to the card-issuing company as an interchange fee. This fee is typically a percentage of the transaction amount plus a flat fee.

The total amount of the interchange fee is typically between 1.5% and 3% of the transaction amount. This fee is passed on to the customer in the form of higher prices.

There has been some controversy surrounding interchange fees in recent years. Some critics argue that interchange fees are too high and that they unfairly burden merchants. Others argue that interchange fees are necessary to cover the costs of processing credit and debit card transactions.

The debate over interchange fees is likely to continue for some time. However, it is clear that interchange fees are a major source of revenue for card-issuing companies and that they play an important role in the payment card industry.

What is MDR in payment via card?

MDR stands for Merchant Discount Rate. It is a fee that merchants pay to payment processors for processing credit and debit card payments. The MDR is typically expressed as a percentage of the transaction amount, plus a flat fee.

The MDR covers the costs of processing credit and debit card payments, including:

1. Fraud prevention
2. Customer service
3. Marketing
4. Risk of non-payment

The MDR varies depending on several factors, including:

1. The type of card
2. The type of transaction
3. The merchant’s industry

In general, MDRs for credit cards are higher than MDRs for debit cards.

Merchants can lower their MDR by using a payment processor that offers lower rates. They can also lower their MDR by processing more transactions.

The MDR is a cost of doing business for merchants who accept credit and debit card payments. However, it is a necessary cost that helps to ensure that the payment card system is secure and efficient.

Here is an example of how MDR is calculated:

• The transaction amount is $100.
• The MDR is 2%.
• The flat fee is $0.25.

The total MDR fee is $2.25.

• $2.00 is the percentage fee.
• $0.25 is the flat fee.

The MDR fee is paid by the merchant to the payment processor. The payment processor then pays a portion of the fee to the card network and the card-issuing bank.

The card network and the card-issuing bank use the fee to cover the costs of processing credit and debit card payments.

The merchant is responsible for passing the MDR fee on to the customer in the form of higher prices.

Let’s learn some numbers.

• The MDR for small businesses is typically higher than the MDR for large businesses.
• The MDR for online transactions is typically lower than the MDR for in-store transactions.
• The MDR can vary depending on the type of card, the type of transaction, and the merchant’s industry.

Here is an example of how MDR can impact a merchant’s bottom line:

• A merchant sells a product for $100.
• The merchant’s MDR is 2.9%.
• The merchant’s profit margin is 10%.

The merchant’s profit on the sale is $9.

• $10 is the sale price.
• $0.90 is the merchant’s profit margin.
• $0.10 is the MDR fee.

The MDR fee represents a significant portion of the merchant’s profit on the sale. By understanding the MDR, merchants can make informed decisions about how to accept credit and debit card payments.

How is MDR is affected by UPI in India?

MDR or Merchant Discount Rate, is a fee that merchants pay to payment processors for processing credit and debit card payments. In India, the MDR for UPI transactions is zero. This means that merchants do not have to pay any fees to payment processors for processing UPI payments.

The zero MDR for UPI transactions was introduced by the Reserve Bank of India (RBI) in 2019. The RBI said that the move was aimed at promoting digital payments and reducing the cost of doing business for merchants.

The zero MDR for UPI transactions has had a significant impact on the Indian payments landscape. It has led to a sharp increase in the number of UPI transactions. In 2021, the number of UPI transactions in India was over 55 billion. This was a 225% increase from the number of UPI transactions in 2020.

The zero MDR for UPI transactions has also led to a decline in the use of cash. In 2021, the value of cash transactions in India was about $1.5 trillion. This was a decline of 10% from the value of cash transactions in 2020.

The zero MDR for UPI transactions is a positive development for the Indian economy. It has helped to promote digital payments, reduce the cost of doing business for merchants, and reduce the use of cash.

Here are some of the benefits of zero MDR for UPI transactions:

• It promotes digital payments. UPI is a digital payment system that allows users to make payments without using cash or cards. The zero MDR for UPI transactions makes it a more attractive option for merchants and consumers.
• It reduces the cost of doing business for merchants. Merchants do not have to pay any fees to payment processors for processing UPI payments. This can save them a significant amount of money.
• It reduces the use of cash. UPI transactions are a more convenient and secure way to make payments than cash. This can help reduce the amount of cash in circulation, which can make it more difficult for criminals to use cash for illegal activities.

Overall, the zero MDR for UPI transactions is a positive development for the Indian economy. It has helped to promote digital payments, reduce the cost of doing business for merchants, and reduce the use of cash.

Conclude

The Reserve Bank of India (RBI) has recently announced that it will be capping the MDR for credit and debit card transactions at 0.4% for small businesses and 1% for large businesses. This is a significant reduction from the current MDR rates, and it is expected to have a positive impact on the Indian economy.

The reduction in MDR rates will make it more affordable for merchants to accept credit and debit card payments. This will encourage more merchants to accept cards, which will lead to an increase in digital payments. The increase in digital payments will help to reduce the use of cash, which will make it more difficult for criminals to use cash for illegal activities.

Overall, the reduction in MDR rates is a positive development for the Indian economy. It is expected to boost digital payments, reduce the use of cash, and make it more difficult for criminals to use cash for illegal activities.

Reserve Bank of India: Notifications

UPI processes 40% of global real-time payments: NIPL CEO Ritesh Shukla

https://www.npci.org.in/what-we-do/upi/upi-ecosystem-statistics