UPSC Prelims 2018 Q6: Indian Economy – Digital Payments & Financial Inclusion
- (a) The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank.
- (b) The amount paid back by banks to their customers when they use debit cards for financial transactions for purchasing goods or services.
- (c) The charge to a merchant by a bank for accepting payments from his customers through the bank’s debit cards.
- (d) The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Sale (PoS) machines and debit cards.
Answer: (c) The charge to a merchant by a bank for accepting payments from his customers through the bank’s debit cards.
Explanation
Merchant Discount Rate (MDR)
Definition: MDR is the fee charged by a bank/payment processor to a merchant for accepting card-based (debit/credit) or digital payments from customers. It is expressed as a percentage of the transaction value and is deducted from the amount the merchant finally receives.
| Option | Correct? | Detail |
|---|---|---|
| (a) Bank incentive to merchant for accepting debit-card payments | NO | This describes a subsidy/incentive, opposite of a fee. |
| (b) Bank cashback to customers for using debit cards | NO | This is a customer reward, not MDR. |
| (c) Charge to merchant by bank for accepting debit-card payments | YES | This is the textbook definition of MDR. |
| (d) Government incentive to merchants for promoting PoS/digital payments | NO | This describes MDR reimbursement schemes (like the earlier NPCI-linked subsidies), not MDR itself. |
Policy Context: Government of India waived MDR on RuPay debit cards and UPI (BHIM-UPI) transactions from 1 January 2020 under Section 269SU of the Income Tax Act, to promote digital payments. RBI regulates MDR ceilings on debit cards (small merchants get lower slabs).
Answer: (c) The charge to a merchant by a bank for accepting payments from his customers through the bank's debit cards.
Answer: (c) The charge to a merchant by a bank for accepting payments from his customers through the bank’s debit cards.
Why each option is right or wrong
- (a) Incorrect. This describes an incentive TO the merchant, which is the opposite of MDR (which is a charge ON the merchant).
- (b) Incorrect. Cashback to customers is a marketing incentive, not the merchant's cost of accepting card payments.
- (c) CORRECT. MDR is the fee a bank/payment processor charges the merchant for handling card and digital transactions.
- (d) Incorrect. Government incentives for PoS adoption are separate subsidy schemes, not MDR.
Key point
MDR = merchant's cost of accepting card/digital payments (percentage of transaction), split between issuing bank, acquiring bank and network. Waived by GoI for RuPay debit and BHIM-UPI from 1-Jan-2020.
Remember
Merchant Discount Rate is the fee a bank charges a merchant for accepting payments via debit or credit cards, expressed as a percentage of transaction value. From 1 January 2020, the Government of India waived MDR on RuPay debit cards and BHIM-UPI transactions to promote digital payments, using Section 269SU of the Income Tax Act.
Common mistakes
- Confusing MDR (fee on merchant) with cashback (reward to customer) or interchange fee (share between banks).
- Assuming MDR is charged to the customer - it is deducted from the merchant's payout, not added to the customer's bill.
- Missing that MDR on RuPay debit and BHIM-UPI is zero since 2020 (Section 269SU of IT Act), to boost digital payments.
Exam tip
Rule: Any fee ending with '...rate' or 'discount rate' in payment terminology typically flows FROM merchant TO bank. MDR = Merchant pays, bank Deducts, at a Rate.
Sources
- RBI Circular - Rationalisation of Merchant Discount Rate (MDR) for Debit Card Transactions (2017)
- Section 269SU of the Income Tax Act (inserted by Finance (No. 2) Act, 2019)