This could be among the biggest policy changes in India’s digital payments ecosystem since the introduction of zero MDR. The government is planning to make amendments in the Payment and Settlement Systems Act in order to facilitate the introduction of MDR on certain merchant transactions through UPI.
The new rule on MDR on UPI merchant transactions will not apply to every single transaction made through UPI. The current debate is about making an arrangement by which large merchants are levied a small transaction fee, but small businesses and person-to-person transactions remain exempt from the rule.
The Merchant Discount Rate (MDR) is a charge imposed on businesses by banks and payment system providers for processing electronic payments.
Prior to the introduction of the zero-MDR policy in 2020, merchants making digital payments using cards and specific payment systems charged a small fee on each transaction made. Later on, the government abolished MDR for UPI and RuPay debit card transactions in order to promote the adoption of digital payments nationwide.
With the number of transactions taking place via UPI increasing in billions each month, banks and payment providers have found it increasingly difficult to sustain their payment infrastructure.
It is important to understand that while the latest proposal does not levy any immediate fees, it establishes the regulatory system in order to empower the government to reinstate the MDR system for selective UPI merchant transactions at a later date.
According to reports, it seems like there are plans to charge MDRs only on high value merchant transactions and merchants that exceed an annual turnover level.
Present debates indicate that the proposed amendment in UPI Merchant MDR will mostly impact large businesses, not the local stores and other small businesses.
The first proposal being discussed is the imposition of MDR on merchant UPI payments exceeding ₹2,000 in businesses whose turnover exceeds about ₹1.5 crore per annum. The MDR rates may vary from 0.3% to 0.5%, but an official announcement has not yet been made by the government.
Large hypermarkets, supermarket chains, electronics store, department stores, and organised retail stores are therefore most likely to be covered under this proposal if it is implemented.
As things stand now, there are no plans to levy customers for using the UPI for making payments.
The proposed MDR will apply to merchants who accept digital payments. However, since this will be just another operational cost for them, some retailers may end up bearing the burden, while others may include the cost as part of their price structure.
Peer-to-peer UPI transfers will continue to be free for individual users as per the proposal. Small merchants will also not be covered under the proposed MDR scheme.
The goal of the government seems to be a balancing act between two considerations, namely keeping India’s leading digital payments platform while making sure that it stays financially sustainable.
Banks, financial technology firms, and other payment services providers have constantly stated that the need for cybersecurity measures, fraud protection, servers, compliance, and network maintenance in order to handle millions of free transactions each month is a constant requirement for further investment.