Legality of Extra Credit Card Charges for Indian Consumers

If you've ever paid by credit card at a restaurant or a shop, you may have heard the cashier say, "There will be an extra 2% if you pay by card."

Many customers pay the additional amount assuming it is a mandatory credit card charge. Others switch to UPI or cash to avoid paying more.

But can merchants legally recover these charges from customers? What exactly are swipe charges, who pays them, and why do some businesses actively encourage UPI instead of credit cards?

Here's what consumers should know.

What are credit card swipe charges?

Every time a customer pay by credit card, the merchant typically pays a fee known as the Merchant Discount Rate (MDR) to process the transaction.

The MDR is usually charged as a percentage of the transaction value and represents the cost of accepting card payments.

It should be noted that, this fee is paid by the merchant, not the customer.

The MDR helps compensate different participants involved in processing a card transaction, including the bank that issued the credit card, the bank that provides payment acceptance services to the merchant, and the card network such as Visa, Mastercard or RuPay.

Can merchants ask customers to pay extra for using a credit card?

“Merchants are generally not expected to levy an additional charge simply because a customer chooses to pay by credit card,” says Adhil Shetty, CEO, BankBazaar.

Although the Reserve Bank of India (RBI) regulates payment systems, card acceptance is also governed by agreements between merchants, acquiring banks and card networks.

Card network rules generally prohibit merchants from imposing a surcharge on customers for paying by credit card. If a merchant accepts credit cards, the cost of accepting those payments is generally expected to be factored into the price of goods or services rather than recovered separately from customers, explains Shetty.

“Consumers who encounter such charges may raise the issue with the merchant or their card issuer,” he adds.

Where does the credit card swipe charge actually go?

Many consumers assume that banks keep the entire swipe fee. In reality, the MDR is shared among multiple participants in the payment ecosystem.

The largest share generally goes to the issuing bank, one that issued the customer's credit card, in the form of an interchange fee, as per Shetty.

The acquiring bank, which enables the merchant to accept card payments, retains a portion for payment processing and merchant services.

The card network, such as Visa or Mastercard, receives a comparatively smaller network or assessment fee for facilitating the transaction.

The exact distribution varies depending on factors such as the card type, merchant category and commercial agreements between the parties.

Does the swipe charge differ for online, tap-to-pay and physical card payments?

Not necessarily.

MDR is not determined simply by whether the payment is made online, through contactless tap-to-pay or by physically swiping the card, explains Narayanam.

Instead, the applicable MDR depends on several factors, including the merchant category, the type of card being used, the card network, the acquiring bank and the commercial agreement between the merchant and its payment service provider.

For example, a contactless tap on a POS terminal is generally treated the same way as to a regular card-present transaction from an MDR perspective.

Do swipe charges fund your reward points and lounge access?

One reason credit cards offer attractive benefits such as reward points, cashback and complimentary airport lounge access is that banks earn revenue from several sources, including MDR.

The MDR is one of the key revenue streams supporting the credit card ecosystem.

“It helps fund rewards, cashback, lounge access, fraud management, technology investments and customer servicing, alongside interest income and annual fees,” says Dr. Raj P. Narayanam, Founder, Zaggle.

If MDR were to reduce significantly in the future without other revenue sources replacing it, card issuers may need to reduce benefits, he notes.

The industry has already seen several issuers revise reward programmes and lounge access benefits as they seek to balance programme costs with revenues.

Why do many merchants prefer UPI over credit cards?

One of the biggest reasons is cost.

Person-to-merchant UPI payments made directly from bank accounts currently do not attract MDR, making them significantly cheaper for merchants than accepting credit cards, says Shetty.

Smaller businesses also find UPI QR codes easier and cheaper to deploy than maintaining card terminals.

However, credit cards continue to offer advantages that UPI may not.

Many consumers prefer using credit cards for higher-value purchases because they provide interest-free credit periods, EMI facilities, purchase protection and rewards.

For merchants, accepting credit cards may also help increase sales by giving customers greater payment flexibility.

Ultimately, the preferred payment option depends on the merchant's business model, customer preferences and the cost of accepting different payment methods.

How can consumers avoid unnecessary disputes over swipe charges?

Experts say transparency is the best way to avoid payment-related disputes.

Narayanam advises consumers to:

Check the final transaction amount before approving payment.

Ask the merchant to explain any additional charges.

Use trusted merchants.

Enable transaction alerts.

Immediately report any unauthorised transactions to the card issuer.