A recent study by the Indian School of Business (ISB) has raised concerns that the proposed Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions over Rs 2,000 could have a broader impact than anticipated, particularly on India's vast network of street vendors.
The National Payment Corporation of India (NPCI) announced a 0.40% MDR on person-to-merchant (P2M) UPI transactions exceeding Rs 2,000, a move intended to make the popular digital payment system more sustainable. While proponents argue that this would leave approximately 96% of P2M transactions unaffected, the ISB study suggests the implications for small businesses, especially street vendors, could be substantial.
Wider Impact on Wholesale Payments
The ISB study, which surveyed 722 street vendors across 14 states and union territories, found that nearly 70% of these vendors make supplier payments exceeding Rs 2,000 at a time. These business-to-business (B2B) transactions, often overlooked in public discourse, fall squarely within the proposed MDR framework.
Anand Sudhakaran, a co-author of the study, highlighted the disproportionate effect on vendor margins. “If a vendor purchases goods worth Rs 15,000 from a supplier, they will incur an MDR of around Rs 60. While seemingly minimal, this translates to roughly a 6 percentage point tax on their daily net profit of Rs 1,000,” Sudhakaran explained. This additional cost on procurement could directly influence retail pricing decisions, potentially leading to higher prices for consumers.
Risk of Reverting to Cash
A significant finding of the study is the strong likelihood of vendors reverting to cash payments if suppliers impose additional charges. Almost all surveyed vendors indicated they would switch back to cash under such circumstances. Already, 10.4% of vendors reported being asked for extra charges for UPI payments by suppliers in the ten days prior to the survey.
The study cautions that while exemptions based on transaction size might protect small merchants at the retail level, they fail to account for wholesale procurement costs. If suppliers pass on these charges, vendors, who often operate on already thin margins, may find cash a more appealing and cost-effective payment option, undermining the push for digital adoption.
Need for Comprehensive Accounting
Professor Prasanna Tantri, executive director of the Centre for Analytical Finance at ISB, emphasized the need for a more comprehensive evaluation of the MDR. “The current accounting primarily focuses on costs, neglecting the significant benefits derived from UPI data,” Tantri stated. He pointed out that UPI payment data serves as a valuable public good, enabling fintech companies to evaluate vendors based on their cash flows, which supports financial inclusion.
The study advocates for caution in implementing the proposed MDR framework, urging a nuanced approach that considers the full economic ecosystem, including B2B transactions and the broader benefits of digital payments beyond direct revenue generation.
Varying Digital Adoption
The ISB survey also shed light on varying UPI adoption rates across different urban tiers. In Tier 1 cities, 82% of vendors accepted digital payments, compared to 66% in Tier 2 and 64% in Tier 3 cities. Awareness of the proposed MDR charges also differed significantly: 66% of Tier 1 vendors were aware, versus 55% in Tier 2 and 47% in Tier 3.