The government is reportedly evaluating a proposal to reinstate the merchant discount rate (MDR) on Unified Payments Interface (UPI) and RuPay debit card transactions for large merchants. This move comes as banks and payment service providers push for a sustainable revenue model, citing increasing operational costs and declining government subsidies for digital payments.
What is MDR and Why is It Important?
MDR (Merchant Discount Rate) is a fee that merchants pay to banks for processing digital transactions. This fee helps cover the costs associated with maintaining payment infrastructure, security measures, and compliance requirements. Since the government removed MDR on UPI and RuPay debit card transactions in the financial year 2021-22, banks and payment service providers have faced significant revenue challenges.
Currently, MDR is not levied on UPI and RuPay debit card transactions, which has contributed to the rapid growth of digital payments in India. However, banks and payment aggregators argue that the absence of MDR threatens the long-term sustainability of the digital payment ecosystem.
Proposed Tiered Pricing Model
Under the proposed system, the government is considering a tiered MDR structure based on the merchant’s annual turnover. According to reports, businesses with an annual GST-linked turnover above Rs 40 lakh would be required to pay MDR on UPI and RuPay debit card transactions. On the other hand, small merchants with an annual turnover below Rs 40 lakh would continue to benefit from zero-cost UPI transactions.
Why Are Large Merchants Being Targeted?
The rationale behind charging large merchants is that they already pay MDR on transactions conducted via Visa and Mastercard debit cards and all credit card payments. Banks argue that treating UPI and RuPay transactions differently for large merchants creates an imbalance in the payment ecosystem.
While the exact MDR rate is yet to be finalized, previous MDR rates for UPI transactions were below 1% of the transaction value before being removed in FY22. Industry insiders suggest that the new MDR structure will aim to strike a balance between merchant costs and the financial sustainability of payment service providers.
Impact on Small Merchants and Businesses
Small businesses with a turnover below Rs 40 lakh will not face any MDR charges for UPI transactions, ensuring that UPI remains a low-cost digital payment option for them. This exemption aims to protect small businesses from additional financial burdens and maintain the momentum of digital payments in rural and semi-urban areas.
Why Is MDR Being Reconsidered Now?
Two key factors are driving the reconsideration of MDR:
1. Revenue Pressure on Payment Providers: Payment aggregators and banks have argued that maintaining digital payment infrastructure without MDR is becoming increasingly difficult, particularly with rising compliance costs under the Reserve Bank of India’s (RBI) PA-Online rules.
2. Reduced Government Subsidies: The Union Budget for FY25 significantly cut subsidies for digital payments from over Rs 3,500 crore to Rs 437 crore. This reduction in financial support has intensified the pressure on banks to recover costs through alternative means.
Potential Impact on Consumers
Consumers are unlikely to be directly affected by the reintroduction of MDR, as it is a charge levied on merchants. However, some merchants may choose to pass on the cost to customers by increasing product prices or introducing additional fees for digital payments.
What’s Next?
The government is currently reviewing the proposal, and a final decision is expected in the coming months. Industry stakeholders, including banks, payment service providers, and fintech companies, are closely monitoring the situation. The outcome could have a significant impact on India’s digital payment landscape, especially for large merchants and the broader fintech ecosystem.
