What are Payment Gateway Charges & How do They Work?
4 min read
For every online sale, there’s more happening behind the scenes than just money changing hands. A small fee is part of the process and understanding what payment gateway charges are can help you manage your costs better. One key part of this payment gateway process is the Merchant Discount Rate/MDR.
What is a Merchant Discount Rate?
It is a fee taken by payment services like your gateway or bank each time a customer pays. It covers the cost of securely moving money from your customer’s account to yours.
In this guide, we’ll explain what payment gateway charges really are, how MDR works behind the scenes, and what online businesses like yours can do to keep these costs in check. First let’s understand:
What Are the Components of a Payment Gateway Charge?
When your online store processes a payment, the fee you pay is often just seen as a single percentage actually covers several moving parts. Let’s break it down so you can see where your revenue is going:
1. Merchant Discount Rate
This is the core fee, usually shown as a percentage of the transaction value (e.g., 2%). It’s split between three main players:
Payment Gateway: For providing the technology that processes the transaction.
Customer’s Bank (Issuing Bank): For verifying and approving the payment.
Card Network (like Visa, Mastercard, or RuPay): For securely routing the transaction between banks.
MDR is essentially the price you pay for using this secure, fast system.
2. Platform or Service Fee
Some payment gateways charge an additional platform fee either monthly or per transaction. This covers features like:
Dashboard and reporting tools
API access for developers
Support for multiple payment options (UPI, credit/debit cards, netbanking, wallets, etc.)
Not all providers charge this separately; sometimes it’s bundled into the MDR.
3. Setup or Integration Fees
Depending on the provider, you might pay a one-time setup fee to integrate the payment gateway with your website or app. Many newer platforms waive this to attract small businesses.
4. Maintenance or Annual Fees
Some traditional providers charge an annual or monthly fee for maintaining your merchant account. Modern gateways usually skip this, especially for startups and small businesses.
5. International Transaction Fees
If you accept payments in foreign currencies, there may be an extra charge, typically 1%–3% to cover currency conversion and cross-border processing.
Understanding each part of the payment gateway charge helps you evaluate whether you’re getting good value. In the next section, we’ll take a closer look at how they work and why it’s a key number every online business should track.
Let’s say a customer buys a product from your website for ₹1,000. If your MDR is 2%, here’s what typically happens:
₹20 (2%) is deducted as the MDR
₹980 is transferred to your business account
That ₹20 doesn’t all go to one party. It’s divided among Payment Gateway, Customer’s Bank andCard Network.
Key Things to Know:
MDR is not fixed- It varies depending on the payment method. Credit cards usually have a higher MDR than UPI or debit cards.
Business size matters – Larger businesses may negotiate lower MDRs due to higher volumes.
Government regulations may apply – In some regions or for certain types of transactions (like UPI or debit card payments), there may be MDR caps or zero charges to promote digital payments.
So while MDR is a cost, it’s also an investment in secure, seamless transactions that help build trust with your customers.
Once you understand how payment gateway charges work, the next step is choosing the right partner, one that supports your growth while keeping your costs in check. PhonePe Payment Gateway is built with exactly that in mind.
Whether you’re a startup, a fast-scaling brand, or an established enterprise, PhonePe PG offers a powerful, flexible solution to handle all your digital payments backed by the trust of millions of users and deep integrations with leading banks and merchants.
PhonePe PG is currently running a limited-time Super Saving Offer for new users: zero processing fees, no hidden costs, no setup charges, no transaction fees, no monthly charges, free setup, and instant activation. It’s the perfect opportunity to start accepting payments with zero deductions and full transparency.
For more information about getting started with PhonePe PG, read more here.
