Merchant Acquiring: Accepting Digital Payments for Your Business
Merchant acquiring is the process that enables businesses to accept digital payments from customers through various channels - debit cards, credit cards, UPI, net banking, and mobile wallets. In India's rapidly digitizing economy, accepting digital payments is no longer optional but essential for business growth.
This comprehensive guide covers everything merchants need to know about payment acceptance - from choosing between payment aggregators and direct bank acquiring to understanding MDR (Merchant Discount Rate), setting up POS terminals, and managing settlements.
Understanding Merchant Acquiring
The merchant acquiring ecosystem involves several key players:
- Merchant: Business that accepts digital payments
- Acquiring Bank: Bank that processes transactions for the merchant
- Payment Aggregator: Technology platform that connects merchants to multiple payment methods
- Payment Network: Visa, Mastercard, RuPay, NPCI (for UPI)
- Issuing Bank: Customer's bank that issues the card/account
Transaction Flow
- 1. Customer initiates payment at merchant
- 2. Payment request routed through aggregator/gateway
- 3. Authorization request sent to issuing bank
- 4. Issuing bank approves/declines
- 5. Response sent back to merchant
- 6. Settlement happens next day (T+1)
Payment Aggregator vs Direct Acquiring
Payment Aggregator
Examples: Razorpay, PayU, Paytm, PhonePe
- ✓ Single integration for all payment modes
- ✓ Easy onboarding and setup
- ✓ Better technology and APIs
- ✓ Value-added services (analytics, refunds)
- ✗ Higher MDR rates
- ✗ Dependent on aggregator's stability
Direct Bank Acquiring
Examples: HDFC, ICICI, SBI, Axis Bank
- ✓ Lower MDR rates
- ✓ Direct relationship with bank
- ✓ Potentially better settlement terms
- ✓ Suitable for high-volume businesses
- ✗ Complex integration process
- ✗ Separate integrations for each mode
Recommendation: Small-medium businesses should start with aggregators. Large enterprises with high volumes may benefit from direct acquiring.
Understanding MDR (Merchant Discount Rate)
MDR is the fee charged for processing digital payments. It varies by payment method:
| Payment Method | MDR Rate | Notes |
|---|---|---|
| UPI | 0% (Free) | RBI mandated zero MDR |
| Rupay Debit Card (≤₹2,000) | 0.4% | Government subsidized |
| Rupay Debit Card (>₹2,000) | 0.9% | Government subsidized |
| Visa/Mastercard Debit | 0.9% - 1.5% | Varies by transaction size |
| Credit Cards (Domestic) | 1.5% - 2.0% | Most expensive domestic |
| International Cards | 2.5% - 3.5% | Plus currency conversion |
| Net Banking | 1.8% - 2.2% | Varies by bank |
| Wallets | 1.8% - 2.5% | Varies by wallet provider |
Types of Payment Acceptance Solutions
1. POS (Point of Sale) Terminals
Physical devices for card payments at retail locations. Types include:
- • Traditional POS: Desktop/wired, most reliable for high volume
- • Android POS: Smart terminal with touchscreen, runs apps
- • mPOS: Portable device connected to smartphone
- • SoftPOS: Mobile app turns phone into POS
2. Payment Gateway
Online solution for e-commerce websites and apps. Enables acceptance of cards, UPI, net banking, and wallets through API integration.
3. QR Code Payments
Zero-cost solution for accepting UPI payments. Types include:
- • Static QR: Fixed code, customer enters amount
- • Dynamic QR: Generated per transaction, pre-filled amount
- • Bharat QR: Interoperable across all UPI apps
4. Payment Links
Shareable links sent via WhatsApp, SMS, or email. Customer clicks and pays. No website or app needed.
Settlement Process and Timeline
Settlement is when the money actually reaches your bank account:
T+0
Same day settlement. Premium service, usually with additional fee.
T+1
Next working day. Standard settlement timeline for most providers.
T+2 or T+3
2-3 working days. Some traditional bank setups.
Note: No settlements on bank holidays. Factor this into cash flow planning.
Chargebacks and Dispute Management
A chargeback is when a customer disputes a transaction and requests reversal through their bank:
- Common Reasons: Fraudulent transaction, goods not received, defective product, duplicate billing
- Process: Customer disputes → Bank raises chargeback → Merchant notified → Merchant responds with evidence → Resolution
- Timeframe: Typically 120 days from transaction; merchant usually has 10-15 days to respond
- Costs: Chargeback fee (₹500-₹2,500), loss of merchandise, administrative time
Prevention: Clear refund policy, good customer service, prompt delivery, delivery confirmation, fraud detection tools.
Compliance and Security Requirements
RBI Regulations
- • KYC as per PMLA
- • Settlement within T+1
- • Grievance redressal mechanism
- • Data localization
PCI-DSS Compliance
- • Encryption of card data
- • Secure access controls
- • Regular security testing
- • Network monitoring
Data Protection: DPDP Act 2023 compliance required. Obtain consent for data usage, implement security measures, have data breach response plan.
How to Choose the Right Solution
Analyze Your Business
Physical store, online, or both? Expected transaction volume? Average ticket size? Which payment modes do customers prefer?
Compare Costs
Look at MDR for each payment mode, setup fees, annual charges, rental vs purchase costs. Calculate effective cost based on your payment mix.
Check Technology
Integration ease, API quality, dashboard features, mobile app availability, reporting capabilities.
Evaluate Support
Onboarding assistance, technical support responsiveness, dispute handling support, dedicated relationship manager.
Benefits of Accepting Digital Payments
Increased Sales
Customers spend more with cards vs cash. Impulse purchases increase. Higher average ticket size.
Better Cash Flow
Faster money in bank (T+1). Better cash flow management. No cash handling risks.
Operational Efficiency
Automatic reconciliation. Digital records for accounting. Reduced cash management costs.
Business Credibility
Professional image. Customer trust. Required for B2B transactions.
Quick Start Checklist
For Physical Stores
- ✓ Get POS terminal or QR code
- ✓ Compare 2-3 providers
- ✓ Complete KYC documentation
- ✓ Display QR at checkout
- ✓ Train staff on usage
For Online Businesses
- ✓ Choose payment gateway
- ✓ Complete business verification
- ✓ Integrate APIs or use plugins
- ✓ Test all payment modes
- ✓ Set up webhook notifications