The Indian government has initiated discussions regarding the potential introduction of merchant fees on digital payments, specifically for the Unified Payments Interface (UPI) and RuPay debit cards. This move comes as Finance Minister Nirmala Sitharaman tabled amendments to the Payment and Settlement Systems Act, 2007, which would allow for the future notification and levying of Merchant Discount Rates (MDR) on specified digital transactions.
What is Merchant Discount Rate (MDR)?
Launched in 2016, UPI has rapidly become a dominant force in India's digital payment landscape, facilitating billions of transactions monthly. MDR is essentially a fee paid by merchants to banks for processing digital transactions, including those made via credit and debit cards. Before 2020, the Reserve Bank of India (RBI) permitted MDRs ranging from 0.40% to 0.90% on debit card payments and up to 0.30% (capped at ₹100) on UPI person-to-merchant (P2M) transactions.
The zero MDR policy, introduced in 2020, significantly boosted UPI's adoption by making it cost-free for both merchants and consumers. A survey by the Department of Financial Services highlighted UPI as the preferred transaction mode, surpassing cash, largely due to its ease of use and instant transfer capabilities.
How Will This Impact Consumers?
For now, consumers have little reason to worry. Government sources indicate that discussions are still ongoing regarding the types of transactions and the quantum of charges. Crucially, daily, small-value transactions, such as payments for cab rides, milk, or vegetables, are expected to remain exempt from MDR. This strategy aims to ensure continued widespread usage and adoption of UPI.
Indications suggest that MDR would primarily be levied on larger ticket-size transactions, potentially above a threshold of ₹2,000 or ₹3,000, at a minimal rate of 0.25% to 0.4%. These charges would apply to payments made to businesses (P2M) and not to peer-to-peer (P2P) transfers. A recent report noted that only a small percentage of UPI P2M transactions currently exceed ₹2,000, suggesting UPI is still maturing in user trust for larger sums.
Implications for Businesses and the Payment Industry
Over 5 crore merchants across India now accept digital payments, largely facilitated by hundreds of millions of QR codes. However, the payment industry has long advocated for the reintroduction of MDR on UPI transactions or increased government incentives. They argue that the zero MDR policy makes it financially unviable to invest further in digital payment infrastructure.
In 2022, the Payments Council of India estimated a substantial loss for the industry due to zero MDR on UPI and RuPay. To counter this and promote digital transactions, the government has provided budgetary support through an incentive scheme for RuPay Debit Cards and low-value BHIM-UPI (P2M) transactions, with significant disbursements made to acquiring banks and shared across the payment ecosystem.
What's Next?
The final contours of the scheme are still being shaped and will take time to be formally notified. It is clear that consumers will not directly bear the MDR; instead, the cost will be divided between merchants and the acquiring banks. The Centre remains committed to boosting UPI's usage and adoption, particularly in rural and semi-urban areas, including through initiatives like UPI Lite.