Decoding MDR: How payment gateway charges really work

India’s digital economy is moving at record speed. In August 2025, UPI crossed 20 billion monthly transactions for the first time, worth nearly ₹25 lakh crore. For context, this is more than the GDP of many mid-sized nations flowing through one payment system in just thirty-one days.

Behind this milestone lies an important truth for businesses. Every digital payment, no matter how small or large, comes at a cost. These costs are often invisible to customers but critical for merchants who need to balance profitability with customer convenience. To manage margins effectively, businesses must understand how payment gateway charges work and what the Merchant Discount Rate (MDR) actually includes. Read on to know more.

What exactly is MDR?

MDR, or Merchant Discount Rate, is the fee a business pays every time a digital payment is processed. It is usually calculated as a percentage of the transaction value. While often grouped under “payment gateway charges”, MDR is shared by multiple stakeholders.

This fee covers technology, processing, settlement and the risk of fraud or disputes. Instead of viewing it as a penalty, merchants should treat MDR as the cost of accessing secure, fast and reliable digital payments.

The stakeholders behind the charges

Each digital transaction involves several players. The MDR is divided among them based on the role they play in processing.

1. Issuing bank: Provides the customer’s card or account, charging a share for underwriting risk
2. Acquiring bank: The merchant’s bank that settles funds, earning a portion for providing infrastructure
3. Card network or scheme: Enables routing of payments between issuing and acquiring banks
4. Payment gateway: Delivers the technology layer, ensuring transactions happen securely and without friction

This collaboration ensures funds move quickly from customers to businesses. While the distribution of MDR may vary, each stakeholder adds value to the payment ecosystem.

Why rates differ across payment modes

Not all transactions carry the same cost. Payment gateway charges vary by mode of payment. Debit card transactions often have lower MDR compared to credit cards because of reduced credit risk. EMI transactions, reward points redemption or cross-border payments may involve higher rates due to added complexity.

Businesses should evaluate which payment options their customers prefer and balance charges against the value of customer retention. Sometimes, offering affordability solutions or rewards-based options, even at a higher MDR, drives larger order values that justify the cost.

The role of technology in pricing

Modern gateways invest heavily in features that go beyond transaction routing. The best systems offer affordability solutions, mobile-first design, high approval rates and fast onboarding. These features create economic benefits for merchants but require ongoing investment in infrastructure and security.

Part of the payment gateway charges reflects the cost of maintaining these advanced systems. By ensuring a smooth customer experience, merchants indirectly recover the fees through higher conversions and stronger loyalty.

Balancing charges with revenue growth

Many businesses view MDR as a cost to minimise. A more strategic approach is to evaluate it against revenue growth. For example, a premium payment gateway with high approval rates reduces failed transactions. Even with slightly higher fees, the net revenue captured is often higher.

Similarly, offering EMI or points-based payments may increase MDR, but they also drive up average order values. Merchants need to calculate the trade-off between charges and revenue expansion. The right balance ensures payment gateway charges are not seen as erosion of margins but as enablers of growth.

Regulations and transparency

In India, MDR has been a subject of regulatory attention. The government has capped or waived fees on certain modes, especially for small-ticket debit card and UPI transactions. While this reduces the cost burden for merchants, it also highlights the need for transparency in how payment gateway charges are structured.

Merchants should demand clear reporting from their service providers. Detailed invoicing and dashboards help identify trends, spot inefficiencies and plan for long-term cost management. Transparency is essential in building trust between merchants and their payment partners.

Security and risk management costs

Fraud, chargebacks and disputes carry significant financial risk. A portion of payment gateway charges goes towards advanced fraud detection, encryption and compliance with global security standards. This investment protects both customers and merchants.

For businesses, lower fraud-related losses often outweigh the fees. Secure systems reduce chargeback penalties, preserve brand trust and keep customers transacting with confidence. In the long run, strong security is an economic advantage, not an optional extra.

Decoding charges smartly

In a market processing over 20 billion UPI transactions a month, payment costs are unavoidable. What matters is how businesses interpret them. MDR and payment gateway charges are not just deductions but investments in reliability, security and customer experience.

By choosing the right gateway, merchants capture more revenue, reduce operational risk and gain valuable flexibility. Decoding charges helps businesses align costs with outcomes and unlock long-term profitability in India’s fast-expanding digital economy.

For businesses ready to scale with confidence, payment gateways like Pine Labs Online provide the technology, features and trust needed to grow sustainably.