Point of Sale terminals: How do they work?

A point-of-sale (POS) terminal is a computerised replacement for a cash register which can process credit and debit cards.   | Photo Credit: M.A. Sriram

The government wants banks to install three lakh Point of Sale terminals in the next three months. Following the withdrawal of high-value currency notes, activity at PoS terminals saw exponential growth, even as the number of new such machines installed has also gone up. Here is how it works:

What is a PoS terminal?

A point-of-sale (POS) terminal is a computerised replacement for a cash register which can process credit and debit cards. A customer needs to enter a card PIN to complete the transaction using the PoS terminal.

How to install one?

If you are a merchant, then you can request the bank where you have an account to install PoS machines at your establishment.

What are the charges?

The end-customer does not have to pay any charges for swiping his or debit/credit cards at the PoS terminals.

However, the merchant has to pay the issuer bank what is known as merchant discount rate (MDR). The issuer bank is the one which installs the machines at the merchant establishment.

In theory, though customers don’t have to pay, in practice, merchants increase the cost of the product and services sold, in a move to pass on the charge incurred by them to the customer.

Separate charges for debit and credit cards

MDR is capped for debit cards but not for credit cards. Effective July 1, 2012, RBI capped the MDR for debit cards at 0.75 per cent of the transaction amount for value up to Rs.2,000 and 1 per cent for a transaction amount for value above Rs.2,000. For credit cards, the MDR varies between 1.5 per cent to 2.5 per cent. Following the withdrawal of legal tender status to the old Rs.500 and Rs.1,000 currency notes, RBI had asked banks to waive off the MDR till the end of December. Last week, RBI also lowered the MDR cap for debit cards effective between January 1 to March 31, 2017. In this period, MDR is capped at 0.25 per cent for debit card transactions up to Rs.1,000 and 0.5 per cent for transactions above Rs.1,000 up to Rs.2,000.


The accounts are settled at the end of the day when the merchant opts for it. The bank credits the amount to the merchant’s account, after deducting charges, the next day.

Sharing of charges

The MDR that the merchant pays is divided among three entities, the issuer bank (which issues the debit card), the acquirer bank (which installs the PoS), and the payment gateway. The issuer bank get the maximum share of the MDR.

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Printable version | Apr 11, 2021 1:30:07 AM |

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