New MDR charges could undermine digital payments, burden merchants and users, and weaken India’s shift away from cash despite the system’s remarkable nationwide success
The mandarins in the finance ministry are always keen on ferreting out new avenues for revenue even if it is a popular public goods like the Unified Payments Interface (UPI) that made ease of living a bit better than how the people have been inured to in the use of cash. How else could one find any plausible reason behind the Merchant Discount Rate (MDR) charges imposed on UPI transactions that is bound to thwart the whole idea of making cash payment gradually slowed, if not altogether eased out so that people use this new app model for clinching their diurnal transactions ranging from small purchases to relatively bigger ones through their mobile phones?
The advent of the MDR on the hitherto-free UPI transactions, to be effective from October 15 needs to be set against the scale and size from the underlying payment networks that link the beneficiaries and the stakeholders in the system. In August UPI processed 24.51 billion transactions reckoned with 29.82 trillion rupees, with volumes surging by 22 percent year-on-year, spreading across 752 participating banks. UPI has a share of 84 percent in the nation’s digital payments by volume and 49 percent share of global real-time payments volumes, while Walmart’s PhonePe and Alphabet’s Google Pay hold about 80 percent market share by value of UPI transactions in August.
From mid-October, in a bid to make the UPI self-supporting, a merchant rate of 0.4 percent on transactions above two thousand rupees for business transactions is to be charged with some exemptions on money transfers between individuals using UPI (P2P deals). Interestingly, it is argued that 33 percent of person to merchant transactions (P2M) in value terms and 96 per cent in volume terms fall below two thousand rupees. Merchants receiving up to one lakh of rupees of money through UPI transactions shall be exempt from MDR which would help benefit the small vendors such as vegetable and flower shops or small grocery stores. Cognate concessions cover a flat rate of five rupees per transaction in the case of UPI payments for railway tickets, mobile bills, insurance, fuel, and farm inputs and a very measly MDR of 0.02 percent for buying and selling securities and mutual funds. For P2M transactions above 75,000 rupees, MDR has been capped at three hundred rupees.
The pricing model at the launch in 2016 contained nominal charges that was waived temporarily in 2017, following the demonetisation of high denomination currency notes. But in 2020, all charges were abolished, heralding a zero-MDR regime for the past six years that is about to end in mid-October 2026. Even as merchants disburse the fee to banks that process the transactions with a portion being passed on to payment apps such as PhonePe and Google Pay that facilitate such payments, the latest impost on the MDR meant to recoup a part of the huge handout the authorities made over by way of incentive payments to keep the system going sans hassles or cost to the beneficiaries and the stakeholders! Available figures show that government persistent support for the digital payments infrastructure amounted to 8730crore of rupees between 2012-22 and 2024-25.
Hence the latest initiative is to link a part of the cost of the infrastructure to the real-time transactions and businesses that avail themselves of it, while keeping consumer fees free and safeguarding most small value transactions. Analysts contend that UPI currently works at a scale where fraud detection and prevention, cyber security, network resilience and periodic investment are no longer voluntary but need to be part of what it cost to maintain the system spic and span and sans hassles to the community of beneficiaries and users as also the providers.
Critics have posed some valid points to contend that the very idea of popularising the digital payments in daily transactions among people is to discourage the overuse of the ready-cash system people have been conversant with. The new tax system however miniscule the move is, would reverse that objective so much so the cost of printing more currency of various denominations might rise, if there is mild reaction by way of not using UPI by ordinary people with the merchants sneaking into shift the burden on the users in their wily ways.
Even as the authorities have demurred any pressure by the United States (US) to introduce the new proposal in the UPI ecosystem in order to favor American credit card firms, the records reportedly bear out that the benefits would by and large flow to private banks and US-owned UPI apps. As India is keen on exporting its UPI to Global South and other countries, it could make a neat cut in these overseas markets instead of experimenting within when its use is ubiquitous and becoming useful. Do not kill the goose that lays golden eggs by sparing the UPI transactions of any burden!
(G Srinivasan is a senior economic journalist based in New Delhi)
