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Which one of the following best describes the term "Merchant Discount Rate" sometimes seen in news ?
Explanation
The Merchant Discount Rate (MDR) is the fee charged to merchants for payment processing services on debit and credit card transactions.[2] More specifically, it is the fee paid by a merchant to a bank for accepting payment from their customers via digital means.[2] The MDR is expressed as a percentage of the transaction amount.[2] This clearly establishes that MDR is a charge imposed on the merchant, not an incentive or refund.
Option A is incorrect because MDR is a fee charged to merchants, not an incentive given to them. Option B is wrong as MDR is paid by merchants to banks, not the other way aroundâcustomers are not paid back through MDR. Option D is also incorrect because the rate of MDR is fixed and revised by the RBI[2], and it represents a cost to merchants rather than a government incentive. Therefore, option C accurately describes MDR as a charge imposed on merchants by banks for processing customer payments through debit cards.
Sources- [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Merchant Discount Rate > p. 196
PROVENANCE & STUDY PATTERN
Guest previewThis is a classic 'Term in News' question derived from the post-demonetization Digital India wave. While technically a current affairs topic, it solidified into static banking theory quickly. It is a fair question because MDR was the central friction point discussed in every editorial about why shopkeepers preferred cash over cards.
This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.
- Defines Merchant Discount Rate (MDR) explicitly as a fee charged to merchants.
- States MDR applies to debit and credit transactions, so it's a charge for accepting payments, not an incentive.
- Describes MDR as an amount paid by merchants to acquirers for card acceptance services.
- Explains interchange fees are a component of MDR, reinforcing MDR is a cost, not a bank incentive.
- Calls the discount rate the percentage of every sale you pay to your acquiring bank for accepting cards.
- Says the discount rate bundles interchange, assessments, and processor fees â all costs rather than incentives.
Provides a clear definitional rule: MDR is the fee charged to (paid by) a merchant to a bank for accepting digital card payments.
A student can use this rule to note that an 'incentive given by a bank to a merchant' would be the opposite (a payment to the merchant), so the MDR label likely does not denote an incentive.
Contains a multiple-choice question that contrasts the two meanings (incentive to merchant vs charge to merchant), showing the term is contested and clarifying typical alternative interpretations.
A student could treat the question's options as canonical possible definitions and use authoritative sources or a dictionary to adjudicate between them.
Another exam-style item listing the same contrasting options for MDR, reinforcing that MDR is commonly discussed as either a charge or an incentive.
Combine this pattern with the explicit definition in snippet 3 to infer which option aligns with standard usage.
Defines 'debit card' and the context of immediate transfer from cardholder's account, clarifying the payment flow underlying MDR transactions.
A student can use this basic payment flow to reason that MDR would be a processing fee linked to acceptance of such payments, not an incentive paid to accept them.
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