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UPI Merchant Discount Rate (MDR)

IAS Current Affairs

UPI Merchant Discount Rate (MDR): Who Pays And What Is Exempt?

Source: Indian Express
GS II: Governance- e Governance, Digital Public Infrastructure, Financial Inclusion, GS III: Indian Economy- Banking and Financial Technology

Overview

  • UPI merchant payments above ₹2,000 will generally attract a 0.4% MDR, while transactions up to ₹2,000 and P2P payments remain outside the charge framework.
  • Essential services and certain financial-market transactions receive concessional MDR rates, while small merchants under the P2PM category can remain exempt subject to specified limits.
  • The framework raises concerns regarding higher costs for small businesses, possible cash preference, consumer price pass-through and financial inclusion.
  • The framework seeks to address the operational costs of UPI infrastructure while maintaining affordable digital payments and ensuring the long-term sustainability of India’s Digital Public Infrastructure.

Why in the News?

A new framework for Merchant Discount Rate (MDR) on UPI transactions is set to apply from October 15.

News in Brief
  • Under the framework, UPI payments above rupees 2000 made to merchants will generally attract an MDR of 0.4% subject to specified exemptions and special rates.
What is Merchant Discount Rate (MDR)?
  • Merchant Discount Rate (MDR) is the fee associated with processing a digital payment made to a merchant.
  • It is shared among the different entities that facilitate the transaction, such as banks, payment service providers (PSPs) and third-party payment applicaitons.
  • Importantly, MDR is a charge on the merchant side and is not meant to be directly collected from customers making UPI payments.
  • Person-to-Person (P2P) UPI transactions are also outside the MDR framework.
Revised MDR Framework
  • Transactions up to ₹2,000- UPI person-to-merchant (P2M) transactions up to ₹2,000 will remain free under the revised framework.
  • Transactions above ₹2,000- Merchant payments above ₹2,000 will generally attract an MDR of 0.4%.
  • High-value transactions- For UPI payments to merchants exceeding ₹75,000, the MDR will be subject to a maximum cap of ₹300 per transaction.
Special Categories and Exemptions
  • Not all transactions will be covered by the standard 0.4% MDR.
  • Certain categories have been given concessional rates or exemptions.

Essential and priority-related payments

  • Transactions involving railways, telecommunications, insurance, fuel, utility bills, education and agricultural inputs will attract a flat MDR of ₹5 per transaction, instead of the standard 0.4%.
  • This differentiated treatment recognises the wider public and economic importance of these services.

Financial-market transactions

  • Payments related to mutual funds, securities, stockbrokers and dealers will attract a much lower MDR of 0.02%, subject to a ₹300 cap per transaction.

Recurring Payments

  • Certain recurring transactions, including monthly utility bills, OTT subscriptions, recurring investments and automated payments, will not attract MDR where they fall within the specified exempt categories.
What about small merchants and street vendors?
  • A separate Person-to-Person Merchant (P2PM) category has been introduced for small merchants, including street vendors.
  • Merchants receiving up to ₹1 lakh per month through UPI QR codes into their personal bank accounts will not be charged MDR under this category, subject to the applicable conditions.

Monitoring of transaction volumes

  • Banks and payment service providers will monitor the monthly inflows into such accounts.
  • If a merchant receives more than ₹1 lakh per month for three consecutive months, the account may be shifted to the regular Person-to-Merchant (P2M) category.
  • Once classified as P2M, the applicable MDR will be charged on transactions above ₹2,000.
How India uses UPI

The growth of UPI reflects its widespread adoption for both person-to-person (P2P) and person-to-merchant (P2M) payments.

    • P2M transactions account for a larger share by volume, reflecting the widespread use of UPI for everyday purchases and payments to merchants.
    • P2P transactions account for a larger share by value, indicating that individual-to-individual transfers generally involve higher-value payments.
    • High-value P2M transactions form a small share of transactions by volume but contribute significantly to the overall value of merchant payments.
    • The growing scale of UPI demonstrates its importance in India’s digital payment ecosystem, financial inclusion and Digital Public Infrastructure.
Will consumers have to pay more?
  • The government has advised banks to ensure that merchants do not pass the MDR cost directly on to consumers.
  • UPI application providers have also been directed against imposing additional platform fees or hidden charges in connection with these transactions.
  • However, concerns remain regarding the possible response of smaller and informal merchants.
  • Some merchants may attempt to recover the additional cost from customers, while others could prefer cash transactions if digital payments become more expensive.
  • This makes effective monitoring and enforcement important.
  • The NPCI has maintained that the proposed UPI MDR is still considerably lower than charges associated with credit cards and applies only to transactions crossing specified thresholds.
  • On this basis, there is limited justification for merchants to increase retail prices.
Reasons to introduce MDR on UPI
  • UPI may appear to be a simple payment mechanism from the user’s perspective, but its operation involves considerable infrastructure and recurring costs.
  • These include:
    • Payment-processing infrastructure
    • Cloud and data storage
    • Network maintenance
    • Cybersecurity and transaction processing
    • Payment applications
    • Customer-support systems
  • The payment ecosystem has been bearing substantial costs associated with maintaining this infrastructure.

Rationale for MDR

  • Introducing MDR can help create a mechanism to:
    • Compensate entities involved in facilitating digital payments.
    • Support the long-term sustainability of the UPI ecosystem.
    • Provide resources for continued investment in payment infrastructure and technology.
  • Thus, the issue is not merely about imposing a transaction fee; it also concerns the financial sustainability of India’s rapidly expanding digital-payment infrastructure.
Concerns

The proposed MDR framework raises several issues that are relevant to India’s digital economy.

  • Cost of digital payments
    • UPI has become associated with low-cost and convenient digital payments.
    • The introduction of charges on certain merchant transactions could change this cost structure.
  • Impact on small businesses
    • Small merchants often operate with limited margins.
    • Even a relatively small transaction cost could affect their willingness to accept digital payments.
  • Possibility of greater cash usage
    • If merchants consider digital payments more expensive, some may encourage customers to use cash instead.
    • This could affect the pace of India’s transition towards a less-cash economy.
  • Financial inclusion
    • UPI has made digital payments accessible to a wide range of consumers and small businesses.
    • Any change in transaction costs therefore needs to be considered alongside the objective of digital financial inclusion.
  • Sustainability of Digital Public Infrastructure
    • At the same time, UPI requires continuous investment in technology, security and payment infrastructure.
    • Ensuring the financial sustainability of this ecosystem is important for its long-term functioning.

The policy challenge is therefore to balance affordable digital payments, merchant interests and the sustainability of payment infrastructure.

MDR: UPI vs Card Payments
  • The MDR proposed for certain UPI transactions remains lower than the charges generally associated with card payments.
  • According to the article:
    • Credit-card transaction charges can generally range from around 1% to 3%.
    • Debit-card MDR is capped at 0.90%.
  • Therefore, the UPI framework has a different cost structure from conventional card-based payments, while retaining lower charges for several categories of transactions.
Conclusion

The introduction of MDR on selected UPI transactions reflects the need to make India’s digital payment ecosystem financially sustainable while keeping digital payments affordable and inclusive.

A carefully designed framework with exemptions for essential services and protection for small merchants can help balance merchant interests, consumer affordability and the long-term sustainability of Digital Public Infrastructure.

UPSC Prelims and Mains Practice Question

Consider the following statements regarding Merchant Discount Rate (MDR) on UPI transactions:

  1. MDR is a fee associated with facilitating merchant digital-payment transactions.
  2. Person-to-person UPI transactions are subject to the proposed 0.4% MDR.
  3. Small merchants receiving up to ₹1 lakh per month through specified UPI QR transactions can fall under the P2PM category.

Which of the statements given above is/are correct?

A. 1 and 2 only
B. 1 and 3 only
C. 2 and 3 only
D. 1, 2 and 3

Answer: B. 1 and 3 only

Mains Practice Question

Q) The introduction of Merchant Discount Rate (MDR) on certain UPI transactions reflects the challenge of banking affordability with the financial sustainability of India’s digital payment infrastructure. Discuss. (250 words)

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