UPI MDR Explained: Will Payments Above ₹2,000 on Paytm, Google Pay and Other Apps Become Chargeable?

UPI or Unified Payments Interface (UPI), an innovative payment system launched in India, has revolutionized digital payments through instant and cost-effective transactions by millions of users. UPI has now become a part of everyone’s daily routine as the transaction currently remains free of cost for both merchants and consumers.

But a recent amendment to the Payment and Settlement Systems Act has raised concerns regarding the introduction of a Merchant Discount Rate (MDR) on certain UPI transactions. It has been reported that high-value payments, specifically above ₹2,000 to large merchants, may be included in the future MDR system.

It must be noted that the amendment currently does not impose any charges on UPI transactions. There is still no decision from the government regarding the rate of MDR, eligible merchants, limits on implementation timeline.

What is UPI MDR?

Merchant Discount Rate (MDR) is a charge made to merchants to process their digital transactions. This is a charge which is usually divided between banks, payment service providers, and the payment network.

Example,

• Credit cards are charged MDR rates.
• Debit cards have MDR rates based on the nature of the transaction.
• Currently, UPI does not have any MDR for merchants.

Implementation of UPI MDR would mean that businesses accepting some of the UPI transactions may be required to pay a percentage of the transaction value as MDR to the payment provider.

Why is the Government Looking at UPI MDR?

UPI has become one of the world’s largest real-time payment systems. However, as much as there has been an increase in transaction volumes, there are no merchant charges earned by the banks or fintech firms handling the UPI transactions.

The payment system requires consistent investments in the areas of,

• Cybersecurity
• Digital payments technologies
• Fraud prevention
• Transaction processing
• Banking infrastructure

UPI MDR is intended to create a sustainable business model for payment companies while expanding UPI.

What Are the Suggested Changes by the Government?

The government is making some modifications through the Payment and Settlement Systems (Amendment) Bill, allowing the Centre to decide which electronic payment systems would be exempted from charging fees.

The amendments,

• Do not impose MDR on UPI directly.
• Allow the government to have the legal scope to levy charges on some selected payment systems.
• Leave room for further considerations on transaction type and exemption.

Therefore, UPI will not be automatically charged after the passing of the Bill.

Will UPI Transactions above ₹2,000 Be Charged?

There has been talk about the threshold of ₹2,000 on the proposed MDR structure, which is yet to be finalized by the government.

According to reports, the government may impose MDR on,

• UPI transactions above ₹2,000.
• Transactions to large merchants.
• Businesses above some specified turnover.

Some estimates have shown possible MDRs to range somewhere between 0.25% and 0.5%. These are just the estimates and not yet finalized by the government.

Why is ₹2,000 Suggested as a Threshold?

The suggested ₹2,000 threshold follows the notion of focusing on higher transactions without harming smaller transactions.

Industry estimates reveal that,

• High-value transactions constitute a small percentage of the total volume of UPI transactions.
• But they contribute significantly to the total transaction value.

It will enable the payment company to earn money without impacting the usual smaller transactions like,

• Grocery bill payments
• Vegetables payments
• Taxi or auto payments
• Small retailers payments

Will Small UPI Payments Be Free?

As per the proposed system, it is likely that the small UPI payments will remain free.

These payments which will remain outside the MDR system are likely to be,

• UPI payment between individuals
• Small merchant payment
• Daily consumer payments

The final decision will be made by the government.

Should Consumers Pay MDR Charges?

MDR charges mainly apply to the merchants who accept the payment.

For instance, if a consumer makes payment worth ₹5,000 using the UPI platform, the merchant has to pay the MDR charge to the payment service providers.

The effects can be felt indirectly by the consumers if merchants decide to increase prices to meet their costs.

The exact effects depend on,

• MDR charges.
• Categories of merchants.
• Regulations of the government.
• Absorption or passing of the cost by the merchants.

Effects of MDR on Merchants

The effects of MDR charges will differ from one merchant to another.

Large Merchants

Larger organizations and retailers might incur higher costs for processing of payment if high-value payments are included.

Small Merchants

Small merchants should not incur any costs since they are likely to be exempted from low-value payments.

Digital Payment Platforms

Financial institutions, fintech companies, and payment service providers are going to make money out of MDR charges.

Firms like Paytm, Google Pay, and other payment platforms stand to benefit.

What is the Potential for UPI MDR to Generate Revenue?

According to industry experts, implementation of MDR on selective UPI transactions can be a lucrative source of revenue for the payments industry.

Advantages of MDR would include,

• Higher investments in cybersecurity.
• Enhanced payment infrastructure.
• Improved fraud detection systems.
• Sustainability of operations of fintechs.

However, it will ultimately depend on the government’s approved framework.

Why Did the Government Decide to Do Away With UPI MDR?

UPI transactions became free for merchants starting January 2020.

MDR was done away with in order to,

• Promote the adoption of digital payments.
• Further financial inclusion.
• Cashless transactions.
• Greater adoption of UPI by small businesses.

This measure has been instrumental in making UPI one of the top digital payment systems in the world.

Implications for UPI Users

It should be noted that the payments through UPI will not become chargeable right away.

The suggested amendment simply lays down the legislative groundwork for charging fees at some future date. The government still has to determine,

• Percentage MDR.
• Transaction ceiling.
• Eligibility criteria for merchants.
• Turnover criteria.
• Possibility of fee caps.
• Exceptions.

As things stand now, regular UPI users won’t have to worry about anything for the time being.