Charges Merchants Need to Pay for Payment Services

7 min read • Published 27 March 2023
Written by Prateek Agrawal

No wonder the introduction of credit cards has made transactions so much easier. It has saved us the trouble of having to worry about the money available with us. All you now need to do is flash your card and swipe it across the POS, and you are done. But if you are a merchant who wishes to start accepting credit card payments, then you need to uncover details. 

Just knowing how an EPOS machine or payment gateways work won’t be enough. As a merchant, you will have to pay charges for accepting such payments. Therefore, to find out the fees you will have to pay every time a customer uses a credit card, continue to read further. 

Why Do Merchants Have to Pay for Receiving Online Payments?

When cards are used for payments, what is visible on the surface is just the tip of the iceberg. There are several interested parties in a transaction that come together to actually make it successful. 

A merchant who avails of these services is the ultimate beneficiary of these transactions. Letting his customers pay through credit cards or any other online mode helps them increase their customer base. So, as a receiver of the benefit, the merchant is liable to pay all the parties involved for their services. 

The merchant, however, does not need to pay every party separately; the charges are deducted by these parties before the final payment is credited to the merchant account. 

Types of Charges Incurred by the Merchant on Credit Card Use

There are mainly two types of charges that a merchant is liable to pay when his customer uses a credit card to pay them. 

  1. Merchant Discount Rate
  2. Payment Service Provider (PSP) Fee

These charges are, however, not only incurred on the use of a credit card. They stand true for debit cards and other online payment modes as well. PSP fee is charged on digital wallets and facilitation of UPI transactions as well. 

What Is the Merchant Discount Rate?

A Merchant Discount Rate or MDR is what a bank charges a merchant every time for accepting payments through credit or debit cards. MDR is also known as a Transaction Discount Rate or TDR.  Usually, this fee is charged between 1% – 3% of the total value of the transaction. 

Thus, for example, let’s say a customer paid ₹5,000 to you through an EPOS and your bank charges 2% MDR per transaction. Now, when your bank credits the money for this transaction to your account, it won’t be ₹5000. It would instead be ₹4900 after deducting a 2% MDR. Your bank deducts the MDR before crediting the money to your account. 

How Does a Bank Determine MDR for Every Merchant?

You might have already guessed that MDR is not uniform for every merchant. It is determined based on several factors. Some of the key components are:

  1. Interchange Fee: As already discussed, there are multiple parties involved in the success of an online transaction. These parties, like the issuing bank, merchant bank, credit card networks, etc., charge a small commission for their service to you. Depending on what these parties charge, your MDR can vary. 
  2. Sales volume: If you have estimated a high sales volume, your bank might be open to offering you a lower MDR. Even if you feel that your sales volume might initially be low, you can discuss with your bank to reduce your MDR as the volume grows.
  3. Type of Payments: Depending upon the mode of payment that your customers prefer to use, your MDR can also vary. It could be different for payments you receive from debit cards and credit cards.
  4. Risk Factor in the Industry: Depending upon the industry you are operating in and how likely are your customers to default, your MDR can vary. 

Apart from all these factors, as a merchant, you have the right to negotiate your MDR with your bank. You can ask them to bring it down before you set up your portal for online payments. 

What Is Payment Service Provider Fee?

To better understand what a PSP fee is, let us first understand what a payment service provider is. A payment service provider or a merchant service provider is a SaaS aggregator that enables a merchant to accept all sorts of online payments via debit cards, credit cards, digital wallets, online banking and UPI transactions. They are a third-party company responsible for securely completing a transaction. 

Your PSP is responsible for the encryption of every payment that is made to you. In return for integrating the parties and allowing you to successfully receive a payment, they charge you for their service. So when your customer uses a credit card or any other digital payment, you will have to pay a payment service provider fee. 

This fee varies from PSP to PSP and you can choose one that better suits your business goals. 

Additional Charges a Merchant Pays to Set Up Digital Payment

If you think that a per-transaction charge is all you need to pay to be able to receive payments from credit cards or other digital modes, you are mistaken. Being able to avail the service of a payment gateway is a complicated procedure. Your service provider levies several other charges just for you to be able to receive online payments. 

Some of the common charges include:

  1. Set up Charges: This is a one-time fee that some PSPs charge. This fee varies from company to company and covers all the expenses incurred while onboarding a merchant. Some of these expenses include KYC verification, document verification, infrastructure cost, etc. 
  2. Annual Maintenance Charge: Annual maintenance charges are levied for the smooth functioning of the software. It also varies depending on the payment modes that you choose to integrate for your business. Other aspects include infrastructure maintenance, any upgrades required to the software and other necessary maintenance. All of them together form the annual maintenance charges.
  3. Integration Fee: This is a charge levied by your processor for integrating their software with your business website or mobile app if you have any. If you choose to integrate it with multiple platforms, your integration fee will adjust accordingly.

Final Word

Be it the payment service providers, merchant banks, or your card network, all of them play a very critical role in enabling the strength of the economy. They have helped merchants expand their base not just nationally but on a global level as well. 

As a merchant, you can pick from several service providers out there that can help you meet your business goals more smoothly. Make sure you do your research well in advance to understand the pros and cons of picking a service provider for you. 

Frequently Asked Questions

Do I, as a merchant, need to pay the interchange fee on every payment I receive?

Yes, you do. However, this interchange fee is a part of your MDR and your bank does not levy it separately on you. So you do not need to pay it separately unless specified by your banker. 

Are services of payment service providers avoidable? 

If you wish to accept online payments on behalf of your business, ignoring such service is not possible. A PSP helps you to process a transaction safely and in an encrypted manner. Without them, you won’t be able to save yourself from fraud.

What is a merchant bank?

A bank that handles the account of a merchant is a merchant bank. If you are running a business, the bank that helps you maintain your business account, process your payments etc., shall be your merchant bank.

What is a credit card network?

A credit card network or a credit card association is a card company that allows a bank to issue credit cards. Associations like Mastercard and Visa are all card associations. They issue the terms that issuing banks and cardholders need to comply with to have their card.

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Prateek Agrawal

Investment Principal
Prateek is an investment professional with a demonstrated history of working in Debt Capital Markets and wholesale funding to the Corporates. He has more than 9 years of experience in Treasury and Wholesale lending to more than 50 Institutions across India. He is currently working as an Investments Principal at Wint Wealth.

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