MDR on UPI & RuPay Debit Card Transactions

The government is evaluating a proposal to bring back merchant charges on transactions conducted through Unified Payments Interface (UPI) and RuPay debit cards.

What is MDR (Merchant Discount Rate)?

• MDR is a fee paid by merchants to banks for processing digital transactions in real time.
• Currently, UPI and RuPay debit card transactions have zero MDR, meaning merchants do not pay any charges.
• The cost of maintaining the UPI infrastructure is currently borne by banks and the government.

Key Proposal Details

• MDR to be reintroduced for “large merchants”.
• Threshold for applicability: Merchants with GST-based annual turnover of more than ₹40 lakh.
• Current Status: The proposal has been sent to the Union government and is under consideration.
• Proposed by: The banking industry, which has been lobbying for MDR to improve revenue and cover operational costs.

Rationale Behind Bringing Back MDR

• Sustainability of the UPI Payment Ecosystem
  • Banks bear the cost of real-time transaction processing without any revenue.
  • MDR can help cover infrastructure costs and encourage further innovation in digital payments.
• Alignment with Global Payment Models
  • Other card-based payment systems (Visa, Mastercard) charge MDR.
  • Bringing MDR back could help banks invest in improving the digital payment network.
• Targeting Only Large Merchants
  • Ensures that small businesses and MSMEs remain unaffected, preventing disruption in digital payment adoption.
  • Focuses on businesses that already have high transaction volumes.

Potential Implications

• Impact on Merchants:
  • Large businesses may pass the MDR cost onto consumers via higher prices.
  • Some merchants may discourage UPI transactions in favor of cash or other low-cost alternatives.
• Possible Resistance from Merchants & Consumer Groups:
  • UPI adoption has been high due to zero-cost digital payments for merchants.
  • MDR introduction may face pushback from businesses that have already integrated UPI widely.
• Revenue Boost for Banks & Payment Service Providers:
  • Encourages sustainable growth of the digital payments ecosystem.
  • Provides an incentive for banks to enhance UPI services and security measures.

Open Questions & Future Considerations

• What MDR percentage will be charged?
  • Industry speculation suggests 0.3% to 1%, but no official figure has been proposed yet.
• Will there be sector-specific exemptions?
  • Certain industries (e.g., government services, essential goods) may be exempted.
• How will the government balance merchant interests with banking sector needs?
  • A phased introduction or government incentives could soften the impact.

Source: The Economic Times