India has moved a step closer to allowing merchants to be charged on Unified Payments Interface (UPI) transactions. Proposed amendments to the country's Payment and Settlement Systems Act were introduced in Parliament on Tuesday by Finance Minister Nirmala Sitharaman, according to Business Today. The amendment, according to industry and regulatory sources quoted by Reuters, would create the legal framework for imposing a merchant discount rate (MDR) on digital payments — a fee UPI merchants do not currently pay.
What is MDR and why is it being considered
Merchant Discount Rate (MDR) is the fee merchants pay to banks and payment service providers for processing digital transactions, according to Business Today. In India, credit card payments generally attract an MDR of around 1.5%, while debit card transactions can carry charges of up to 0.9%. At present, merchants are charged no MDR on UPI payments.
UPI, among the world's largest real-time payment systems, handled 23.6 billion transactions worth Rs 29.9 trillion ($313.5 billion) in July, according to official figures cited by Business Today. The platform is dominated by Walmart-owned PhonePe and Alphabet's Google Pay. Payment industry executives have consistently maintained that the rapid expansion of digital payments has become increasingly difficult to sustain because service providers do not earn any revenue from UPI transactions, limiting their ability to invest in the payments ecosystem.
What the amendment does — and what it leaves open
The proposed amendment to the Payment and Settlement Systems Act, introduced by Finance Minister Nirmala Sitharaman, would provide the legal framework for imposing an MDR on digital payments, industry and regulatory sources told Reuters. The sources told Reuters that the amendment only establishes the legal authority to levy an MDR. No decision has yet been taken on the quantum of the fee or the categories of transactions to which it would apply.
Two models under evaluation
Policymakers are evaluating two broad models for introducing a Merchant Discount Rate, according to two sources quoted by Reuters:
- One option is to levy the fee only on transactions above a specified value.
- The other links the charge to a merchant's annual turnover.
Under one of the proposals, only large merchants would pay the MDR, while UPI transactions would continue to remain free for consumers and small businesses, the sources said. A government source said authorities are considering an MDR of 0.3% to 0.5% on UPI transactions exceeding Rs 2,000 for merchants with annual turnover above Rs 15 million.
| Parameter | Current UPI regime | Proposal under consideration |
|---|---|---|
| MDR levied | None | 0.3%–0.5% (under consideration) |
| Minimum transaction value | None | Above Rs 2,000 |
| Merchant annual turnover threshold | None | Above Rs 15 million |
| Who bears the fee | No one | Only large merchants, under one proposal |
Revenue impact on the payments industry
According to a report released by Jefferies on Tuesday, transactions above Rs 2,000 account for only 4% of merchant payment volumes but contribute nearly 67% of the total transaction value. The brokerage estimated that such a framework could generate annual revenues of Rs 50 billion to Rs 100 billion for the payments industry, with companies such as Paytm and Pine Labs expected to be among the beneficiaries.
Transactions above Rs 2,000 account for only 4% of merchant payment volumes but contribute nearly 67% of the total transaction value, according to a Jefferies report cited by Business Today.
What merchants should know
For merchants, the immediate position is unchanged: no MDR is currently levied on UPI payments, and the amendment as introduced only creates the legal basis for a future fee, according to Business Today. If a model along the lines under consideration is adopted, the merchant segment that would be exposed is businesses with annual turnover above Rs 15 million receiving UPI payments exceeding Rs 2,000, per the government source cited in the report. Even for that segment, no final decision has been made on the fee quantum or the applicable transaction categories, according to the sources quoted by Reuters. Under one of the proposals, only large merchants would pay the MDR, while UPI transactions would remain free for consumers and small businesses.
Sources:
