The Union Cabinet approved (December 15, 2017) a proposal mandating that government will bear the merchant discount rate (MDR) charges on transactions up to Rs 2,000 on all debit card, BHIM UPI and Aadhaar-enabled payment systems in order to promote digital transactions in the country. This means apart from merchants, consumers will not have to bear any charges on such transactions. The MDR subsidy will apply on transactions from January 1 for a period of two years. The Centre is estimated to reimburse Rs 1,050 crore to banks in FY19 and Rs 1,462 crore in FY20 towards MDR subsidy.
Merchant Discount Rate is the rate charged to a merchant by a bank for providing debit and credit card services. It is the charge a merchant pays to a bank for availing card transaction services. The bank offering the service to the merchant is called the acquiring bank. The rate is determined based on factors such as volume, average ticket price, risk and industry. The merchant must set up this service with a bank, and agree to the rate prior to accepting debit and credit cards as payment. After picking up during initial few months post demonitisation digital transactions had increased, but later the process slowed down. The move is supposed to have a positive effect on digital transactions.