Paying by credit card has become second nature for many consumers. A card is tapped on a machine, a notification arrives within seconds and the transaction is complete. What most people do not see is the chain of banks and payment companies working in the background to process that payment.
That process comes at a cost. Known as a swipe charge or Merchant Discount Rate (MDR), it is a fee paid by merchants for accepting credit card payments. While cardholders generally do not pay it directly, the charge plays an important role in how the card payments ecosystem functions.
Every time that a consumer swipes their card at any store or makes a purchase via e-commerce, the merchant will not get the total amount from the transaction.
Instead, a certain percentage is taken off before the full amount is deposited into the merchant’s account. These are the charges paid by the merchant to the card issuer bank, payment network, and transaction processor. “Swipe fees” has been the term used for quite some time now even though swiping of cards is no longer common today.
The amount varies from one merchant to another. Factors such as the type of business, card network and transaction volume can influence the rate.
In many cases, merchants pay around 1 percent to 3 percent of the transaction value for credit card payments. For example, if a customer spends Rupees 5,000, the merchant may receive slightly less after the fee is deducted. Businesses that process large volumes of transactions often negotiate better rates than smaller establishments.
Features of credit cards are attractive to consumers and include points, cash back deals, fraud protection and interest free days for purchases. In order to provide these features, there is cost and infrastructure involved.
Banks bear the risk associated with credit; networks process transactions, while processors ensure that money moves safely between parties. Swipe fees contribute towards this cost. Without these swipe fees, the economics of issuing credit cards would be quite different.
Why some shops prefer other payment methods
Most small businesses run on very narrow margins. It can become quite annoying for them to pay a share of their profit from each card transaction, particularly in case of transactions where the value is small.
This is another reason why some merchants prefer to ask their clients to use UPI. This is because usually there is no MDR charged to consumers and merchants in UPI transactions.
Not directly. The swipe charge is usually paid by the merchant, not the cardholder.
Even so, it matters because it helps fund many of the benefits attached to credit cards. The reward points earned on shopping, the airport lounge visits and the cashback credited to accounts are all linked, in one way or another, to the revenues generated within the card payments system.
The next time a card payment goes through in a matter of seconds, it is worth remembering that several players are involved behind the scenes. The transaction may look simple from the customer's perspective, but a lot happens before the money finally reaches the merchant.
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