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I recently read the following tweet:

I replied back pointing out that:

He replied back with the following tweet:

@logic was implying that merchants will definitely pass on the MDR cost to consumers.

Even if that’s true, he was confusing MDR for Surcharge. While both amount to a charge on card payments, they’re not the same. By definition, MDR is borne by a Merchant whereas Surcharge is slapped on a Cardholder. There are many other differences between them. Before I list them and explain why they matter to a common man, here’s a graphical depiction of how a card payment works.

The key entities in the so-called “card payment value chain” that processes a card payment are as follows:

  1. Cardholder: The consumer that uses a credit or debit card to buy something e.g. John Doe, Jane Doe
  2. Merchant: The business that sells that “something” to the Consumer and receives payment via payment card e.g. ASDA, Big Bazaar
  3. Issuer: The bank that issues the card used by the Consumer e.g. Barclays, State Bank of India
  4. Acquirer: The bank that issues a Merchant Account and POS (or POS alternatives like Bharat QR) to the Merchant, both of which are required for the Merchant to accept card payments e.g. Citi, HDFC Bank
  5. Card Network: The company that owns the infrastructure – aka “rails” – for processing card payments e.g. Visa, MasterCard.

The card payment value chain is also called a “4-corner marketplace”. Created over 50 years ago, it enjoys the so-called “network effect”, which explains its popularity and longevity. The Merchant incurs a cost for using this infrastructure to accept card payments. This cost is called MDR or Merchant Discount Rate.

With the basics of card payment out out of the way, let me come back to the key differences between MDR and Surcharge:

  1. MDR is the fee incurred by the Merchant for accepting card payments. Any charge levied by the Merchant on a consumer paying by card (over and above the price of the product or service purchased by the Cardholder) is called Surcharge. As we’ll see shortly, Surcharge need not equal MDR (and often does not)
  2. Set by the Card Network, the schedule of MDRs forms a part of the Merchant Account signed between the Merchant and the Acquirer. As a consequence, MDR is pre-defined, strictly regulated and ranges from 0.5-3% depending upon the product purchased and the type of card used for payment. (For the sake of convenience, I’ll assume a uniform MDR rate of 2% during the rest of this post.) On the other hand, Surcharge is totally arbitrary – it’s whatever the Merchant says it is. I’ve come across Surcharges ranging from 2 to 10%. In other words, Merchants slap Surcharge – masked as ‘Convenience Charges’ – that’s as high as 5X of the MDR cost they incur
  3. MDR is deductive. That is, if the sale value at the till is £100, the acquirer retains £2 and passes on £98 to the Merchant. On the other hand, Surcharge is additive. That is, against the purchase value of £100, the consumer incurs a cost of £102 at checkout (going by 2% MDR considered in this post)
  4. Being deductive, MDR attracts no taxes. Whereas, being additive, Surcharge attracts taxes. So, the total debit the Cardholder sees on their statement is even higher than £102
  5. In return for MDR, a Merchant gets many freebies from the Acquirer e.g. fire insurance for store. Cardholder gets nothing for shelling out Surcharge.

In case all this sounds a bit technical, that’s because it is. But it does matter to the payment preference of the average John / Joanne Consumer.

I’ve made no secret of my disdain for Surcharge. According to me, MDR is the Merchant’s cost of doing business. By not accepting credit cards, merchants can lose business. Like rent, electricity, employee and other costs, Merchants have to recover their card processing fees from their sales – they can’t pass it on explicitly. If a Merchant still insists on a Surcharge, I can walk out and buy the same thing somewhere else without paying Surcharge.

Armed with this knowledge, I flatly refuse to pay Surcharge for paying with my credit card.

When Merchants try to justify Surcharge on the grounds that they have to pay a fee to banks, I turn the aforementioned point #5 to my advantage and fire back: “You get fire insurance for your store for incurring MDR. Will you give me fire insurance for my home if I pay you Surcharge?” When they hear this, many Merchants quietly accept my credit card without Surcharge.

Of course, my tactic only works when there’s a human being on the other side whom I can challenge with this logic.

Whenever a website demands a Surcharge, I abandon my shopping cart and rant to the company via Twitter.

Somtimes it works!

You “can’t win ’em all” but that’s no reason why you shouldn’t try!

I know many people use cash because they don’t want to pay extra charges for using their cards. This is a serious stumbling block towards wider adoption of digital payments. I hope such people get enough ammunition from this post to dismiss Merchants’ demand for Surcharge and succeed in paying by card (without incurring any additional cost), thus taking #CashlessIndia to the next level.

Also published on Medium.

Ketharaman Swaminathan On July - 14 - 2017


BFSI, eCommerce, Product, Retail, Uncategorized


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  • sketharaman

    UPDATE DATED 19 JULY 2017:

    I thought 10% was high. According to Finextra, some merchants levy up to 20% surcharge for accepting credit cards payments.

  • sketharaman


    Here’s a nice video on how a credit / debit card payment works.

  • sketharaman



    The Reverse-Robin-Hood-Cross-Subsidy Hypothesis

    Robin Hood and his band of merry men infamously, if apocryphally, robbed from the rich and gave to the poor. Over the last decade, some economists have postulated that credit card companies do the opposite. Until recently, the reverse-Robin-Hood-cross subsidy (“RRHCS”) hypothesis was limited largely to theoretical economic analysis. Not any longer. Although the best available evidence indicates that merchants pay more out-of-pocket to accept credit cards than they do for other forms of payment, these costs are only half the story. Credit cards provide significant benefits to merchants that could outweigh the incrementally higher out-of-pocket costs and thus lead to lower retail prices.


  • sketharaman


    I’d like to think this post has helped in the growth of digital payments, thus accelerating #CashlessIndia!

  • sketharaman


    According to this nice article on Aadhaar Pay, cash accounts for 15% of retail payments in India. That’s down from the 95% figure bandied about before #CurrencySwitch. IMO, a ten percentage point shift from cash to cashless in 15 months is a great achievement towards #CashlessIndia.

    How India’s AadhaarPay jumped the payment network rails

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