Which of the following best describes the term Merchant Discount Rate sometimes seen in news?

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Q: 21 (IAS/2018)

Which of the following best describes the term “Merchant Discount Rate” sometimes seen in news?

question_subject: 

Economics

question_exam: 

IAS

stats: 

0,108,81,33,16,108,32

keywords: 

{'merchant discount rate': [0, 0, 0, 1], 'debit cards': [0, 0, 0, 2], 'digital payments': [0, 0, 0, 4], 'merchant': [0, 0, 0, 1], 'payments': [0, 0, 0, 1], 'merchants': [1, 1, 0, 1], 'incentive': [0, 0, 0, 1], 'financial transactions': [0, 0, 2, 1], 'customers': [0, 0, 1, 2], 'bank': [0, 1, 0, 1], 'banks': [5, 6, 5, 25], 'charge': [1, 0, 4, 12], 'goods': [0, 1, 5, 27], 'sale': [0, 0, 0, 5], 'services': [0, 0, 7, 17], 'term': [28, 1, 9, 27], 'pos': [0, 0, 0, 2]}

The correct answer to this question is Option 3: The charge to a merchant by a bank for accepting payments from his customers through the bank’s debit cards.

Merchant Discount Rate (MDR) is the fee charged by a bank or a payment gateway for accepting payments from customers through debit or credit cards. When a customer makes a payment using their card, the bank or payment gateway charges a percentage of the transaction value as MDR from the merchant. This fee is charged for the processing of the transaction, ensuring its security, and transferring the funds to the merchant`s account.

MDR is a critical revenue source for banks and payment gateways as it covers the cost of setting up and maintaining the payment infrastructure, including Point of Sale (POS) terminals, security, and fraud prevention measures. MDR is typically a small percentage of the transaction value, ranging from 0.25% to 2% depending on the type of transaction and the card network used.

MDR is often seen in news as it affects both merchants and customers. High MDR rates can discourage small merchants from accepting card payments, leading to a cash-only economy. On the other hand, low MDR rates can put a burden on banks and payment gateways, affecting their profitability and ability to innovate and improve their services.

Option 1, which describes the incentive given by a bank to a merchant for accepting payments through debit cards, is incorrect. While banks may offer incentives such as cashbacks or loyalty points to customers for using their debit cards, they do not offer incentives to merchants.

Option 2, which describes the amount paid back by banks to their customers when they use debit cards, is incorrect. Banks may offer cashbacks or rewards to customers for using their debit cards, but this has nothing to do with MDR, which is a fee charged by banks to merchants.

Option 4, which describes the incentive given by the government to merchants for promoting digital payments through PoS machines and debit cards, is incorrect. While the government may offer incentives to promote digital payments, MDR is not one of them. MDR is a charge levied by banks or payment gateways and is not controlled by the government.

In conclusion, Merchant Discount Rate (MDR) is the fee charged by banks and payment gateways for accepting payments from customers through debit or credit cards. It is an important source of revenue for banks and affects both merchants and customers.

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