According to Business Today, Unified Payments Interface (UPI) transactions have become an important backbone of India's digital payments economy, with transaction volumes running into several lakh crore every month. The service, which has remained free so far, may see the imposition of a Merchant Discount Rate (MDR) in the coming days, but the government has clarified that UPI will continue to remain free for consumers and no transaction charges will apply to person-to-person payments.
What is a Merchant Discount Rate and how does it work?
Merchant Discount Rate is a fee that a merchant selling goods or services must pay to accept payments made through credit or debit cards, according to Business Today. The fee is a percentage of the transaction value and is deducted by the bank before the merchant receives the final payment. Vivek Iyer, Partner and Financial Services Risk Advisory Leader at Grant Thornton Bharat, explained that MDR for credit cards comprises three components:
- Interchange fee — paid to the card-issuing bank
- Network/switching fee — paid to the card settlement provider such as Visa, Mastercard or American Express
- Acquirer fee — paid to the bank that onboards the merchant
The report illustrates the flow with an example: a purchase of Rs 10,000 made by credit card with a 2% MDR results in a Rs 200 fee. The merchant receives Rs 9,800, and the Rs 200 is distributed among the three parties, with the largest share going to the interchange fee and the lowest to the card settlement provider, according to Iyer.
What MDR is being proposed for UPI?
The government has said that if an MDR is introduced, it will only apply to a limited category of merchant transactions, with a nominal rate much lower than the MDR currently applicable on credit or debit cards, according to Business Today. The publication reported last week that a threshold of Rs 2,000 is being considered with a possible MDR of 0.25% to 0.4%. That means routine transactions such as milk, vegetables and groceries would not be subject to the charge.
Why is MDR being proposed for UPI?
The proposed amendment to the Payment and Settlement Systems Act aims to make the UPI ecosystem financially sustainable, the government has said, according to the article. Transaction volumes are growing, requiring continued investment in infrastructure, cybersecurity and fraud prevention. A self-sustaining revenue model would help support competition and future expansion.
RBI Governor Sanjay Malhotra said the cost of UPI infrastructure is already being paid indirectly by the economy, as reported by Business Today:
Now, costs have to be paid by someone — it's a public [good]; we all want this particular infrastructure to continue to strengthen, become more efficient. That's our focus as of now — let's watch how developments proceed.
Malhotra added, "Please keep in mind that ultimately it is the consumer, in some way or the other, who is already paying it — it may not be the same consumer, it may be the general economy, and you don't get to see it directly, but it's already happening in some form," according to Business Today.
Ranadurjay Talukdar, Partner and Payments Sector Leader at EY India, pointed out that credit or debit cards and UPI sit on very different cost structures.
How MDR is distributed in a credit card transaction
| Component | Recipient |
|---|---|
| Interchange fee | Card-issuing bank |
| Network/switching fee | Card settlement provider (Visa, Mastercard, Amex) |
| Acquirer fee | Bank that onboards the merchant |
Source: Vivek Iyer, Grant Thornton Bharat, as reported by Business Today.
What UPI MDR would mean for merchants
Because MDR is a cost borne by the merchant rather than the consumer, any future UPI MDR would directly affect sellers that accept UPI payments above the proposed Rs 2,000 threshold, if the proposal is implemented. P2P payments would remain free, and the proposed rate is nominal compared with card MDR, according to Business Today. Marketplace operators and e-commerce sellers in India should track the amendment to the Payment and Settlement Systems Act and the RBI's next steps, as a UPI MDR would add a processing cost to domestic UPI merchant transactions similar to the card MDR structure described above.
The government has not yet announced a final rate or an effective date, according to the report. The proposal remains under consideration.
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