The merchant discount rate, or MDR, is the rate charged to a merchant for the payment processing of debit and credit card transactions. The service is set up by the merchant, and they must agree or commit to the rate before accepting and/or authorizing debit or credit cards for payment processing.
The merchant discount rate can also be defined as a bank fee charged to a merchant for taking payment from their customers through credit and debit cards for goods or services. The bank can lower the rate as sales of merchants increase. Merchants generally pay a 1% to 3% fee for the processing of payments for each transaction. Alternatively, the merchant discount rate is also referred to as the transaction discount rate (TDR).
With the aim of supporting the digital economy and cashless society, the government has announced certain measures in the budget session last year. Last year, the government decided not to impose MDR on merchants or consumers. You can find the statement made by Finance Minister Nirmala Sitharaman here: “…there are low-cost digital modes of payment such as BHIM UPI, UPI-QR Code, Aadhaar Pay, certain Debit cards, NEFT, RTGS etc. which can be used to promote less cash economy. I, therefore, propose that the business establishments with annual turnover more than 50 crore shall offer such low-cost digital modes of payment to their customers and no charges or Merchant Discount Rate shall be imposed on customers as well as merchants.”
Types of buying and Selling rates
- TT Buying Rate (TT stands for Telegraphic Transfer)
This is the rate applied when the transaction does not involve any delay in realization of the foreign exchange by the bank. In other words, the nostro account of the bank would already have been credited. The rate is calculated by deducting from the interbank buying rate the exchange margin as determined by the bank.
Though the name implies telegraphic transfer, it is not necessary that the proceeds of the transaction are received by telegram. Any transaction where no delay is involved in the bank acquiring the foreign exchange will be done at the TT rate.
Transaction where TT rate is applied is:
- Payment of demand drafts, mail transfers, telegraphic transfers, etc drawn on the bank where banks nostro account is already credited.
- Foreign bills collected. When a foreign bill is taken for collection, the bank pays the exporter only when the importer pays for the bill and the banks nostro account abroad is credited.
- Cancellation of foreign exchange sold earlier. For instance, the purchaser of a bank draft drawn on New York may later request the bank to cancel the draft and refund the money to him. In such case, the bank will apply the TT buying rate to determine the rupee amount payable to the customer.
- Bill Buying Rate
This is the rate to be applied when a foreign bill is purchased. When a bill is purchased, the rupee equivalent of the bill value is paid to the exporter immediately. However, the proceeds will be realized by the bank after the bill is presented to the drawee at the overseas centre. In case of a usance bill, the proceeds will be realized on the due date of the bill which includes the transit period and the usance period of the bill.
- TT Selling Rate (TT stands for Telegraphic Transfer)
This is the rate to be used for all transactions that do not involve handling of documents by the bank.
Transactions for which this rate is quoted are:
- Issue of demand drafts, mail transfers, telegraphic transfer, etc., other than for retirement of an import bill.
- Cancellation of foreign exchange purchased earlier. For instance, when an export bill purchased earlier is returned unpaid on its due date, the bank will apply the TT selling rate for the transaction.
- Bills Selling Rate
This rate is to be used for all transactions which involve handling of document by the bank: for example, payment against import bills.
The bills selling rate is calculated by adding exchange margin to the TT selling rate. That means the exchange margin enters into the bills selling rate twice, once on the interbank rate and again on the TT selling rate.
Ready rates based on cross rates
A cross rate is a foreign currency exchange transaction between two currencies that are both valued against a third currency. In the foreign currency exchange markets, the U.S. dollar is the currency that is usually used to establish the values of the pair being exchanged. As the base currency, the U.S. dollar always has a value of one.
When a cross-currency pair is traded, two transactions are actually involved.3 The trader first trades one currency for its equivalent in U.S. dollars. The U.S. dollars are then exchanged for another currency.