Introduction to Merchant Discount Rate and Card Acceptance in India

A question that often arises among shopkeepers is whether it is legal for a merchant to offer different prices for cash and card payments in India. This article explores this topic in the context of Indian law and the complexities of MDR (Merchant Discount Rate).

The Legal Status of Price Variation Between Cash and Card Payments

From a legal standpoint, it is not necessarily illegal for a shopkeeper to have different prices for cash and card payments in India. The primary legal consideration centers around the contract between the merchant and the card-issuing company, which dictates the Merchant Discount Rate (MDR).

The MDR is essentially the percentage of the transaction value that the merchant must pay to a card company (like Visa, MasterCard, or Rupay) as a service fee for processing card transactions. While the exact percentage can vary, in India, the MDR is typically around 2% for credit cards and 1% for debit cards. This means that merchants pay higher fees for higher-risk transactions and may strive to recover some of these costs by passing them on to customers.

Understanding the Merchant Discount Rate

The MDR encompasses various charges and is structured to benefit multiple parties:

Card Issuing Bank: Receives the largest portion, approximately 1.25%. Payment Companies (Visa, MasterCard, Rupay): Collect around 20 basis points. Point-of-Sale (POS) Terminal Providers: Receive a small percentage for providing the POS infrastructure.

Despite the lower MDR for debit cards, the reality in India is that most transactions still occur via credit cards. This discrepancy is due to the high fees banks charge for issuing cards and providing card-related services.

Impact on Retail and Customers

In large retail chains, the difference in pricing is not significant, as the MDR is factored into the overall cost of the transaction. For smaller merchants, however, the impact is more pronounced. When a shopkeeper accepts card payments, they only receive around 98 rupees per 100 rupees of the transaction value, meaning the cash-paying customer subsidizes the transaction. This difference is less steep in absolute terms (Rs. 2000 on a Rs. 1 lakh volume) but significant in percentage terms.

The Erosion of the Cash-Based Economy

In the past, merchants accepted cards because credit cards could facilitate impulse purchases. However, the rise of e-commerce and the need for remote transactions have shifted the landscape. Today, the bulk of card transactions are driven by card features like cashback, rewards, and extended credit periods, which are funded by the merchants themselves.

The Dilemma for Banks and Merchants

Banks face a challenging situation. To promote card usage, they offer cashbacks and other incentives, which require transaction fees to be recouped. However, these transaction fees are structured in a way that makes card acceptance a losing proposition for many merchants due to the MDR.

The paradox lies in incentivizing cardholders while simultaneously discouraging smaller merchants from participating in the card acceptance network. Banks need more card usage to continue yielding transaction fees, but their existing pricing models often make card acceptance unprofitable for smaller merchants.

Conclusion

The ability to offer different prices for cash and card payments is nuanced and largely depends on the specific contract and regulatory environment in India. While it is generally not illegal, the financial realities of MDR make it a contentious issue for both merchants and consumers. As the economy continues to evolve, understanding the intricacies of MDR and its impact will remain crucial for all parties involved.