The Ministry of Finance has taken the first step towards a major policy change that would allow Merchant Discount Rate (MDR) to be levied on UPI transactions made to large merchants. The idea has raised much interest in the digital payments ecosystem of India and is therefore the subject of much discussion but, until now, no decision has been made.
According to the proposal, the government is considering repealing the amendment to Section 10A that currently prevents banks and payment service providers from charging MDR on UPI-based transactions. If the amendment is repealed, banks and payment companies can once again charge MDR on transactions involving larger businesses.
What is MDR?
MDR is a fee that merchants pay banks and payment service providers for processing digital transactions. This fee pays for payment infrastructure, transaction processing, fraud prevention and settlement services.
The current proposal does not charge consumers for making UPI payments. Customers will continue to use UPI without any transaction fee and any potential MDR would be paid by eligible merchants, if implemented.
Why is the government looking at the move?
India’s UPI ecosystem has grown dramatically these years and is now one of the world’s largest real-time digital payment systems. But banks and payment service providers have long claimed that the absence of MDR has made it difficult to recover the costs of maintaining payment infrastructure, expanding networks and investing in cybersecurity.
The industry believes MDR for large merchants could also offer a more sustainable financial model for banks, fintech companies and payment service providers to offer more sustainable financing for businesses and consumers and at the same time to protect small businesses and consumers.
Will every merchant be affected?
At this point in time, the proposal seems to be aimed at large merchants not small businesses or individual users. The government has not yet released the final framework, for example, any thresholds or eligibility criteria for merchants who may be covered by the revised policy.
No impact on UPI Users
One of the key points that is captured in the proposal is that UPI users will not be charged for making payments. So customers continue scanning QR codes and transferring money through UPI apps without paying transaction fees.
The proposal only touches on the commercial arrangements between merchants, banks and payment service providers.
What happens next?
The proposal is in the very beginning of the policy process and should be discussed with the stakeholders before any legislative or regulatory changes come into effect. Any changes to the MDR framework must have the approval process and implementation guidelines.
A massive development for India’s Digital Payments industry.
If implemented, the move would revolutionize the economics of India's digital payments ecosystem by providing banks and payment companies with additional revenue as well as the free UPI experience for consumers.
For now, businesses, financial institutions and payment service providers will be watching closely the government’s next steps. And until a firm decision is made, the proposal is only an advisory and not a policy change.
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