Proposal to Introduce MDR for UPI: Potential Impact on Users and Merchants

The Reserve Bank of India (RBI) cautions against panic regarding the introduction of charges for UPI transactions. Under a bill presented by the Ministry of Finance in Parliament, the introduction of Merchant Discount Rate (MDR) is being discussed, which may apply to payments exceeding the limit of 2000 rupees.

The emergence of this news has caused concern among the public, and surveys indicate a potential withdrawal of many users from the UPI system due to the new rules. However, RBI Governor Sanjay Malhotra emphasized that it is premature to draw any conclusions, as the payment system is still in the discussion phase of changes.

RBI Governor Sanjay Malhotra noted that one should not rush to make statements regarding the introduction of MDR for UPI transactions. He clarified that the discussion process for the payment system continues, and this system previously helped reduce the need for cash in small transactions. Malhotra stressed that the Reserve Bank's priority is the maximum adoption of UPI, and the government continues to work on amendments.

According to Sanjay Malhotra, the costs associated with the electronic payment system must ultimately be borne by someone.

Finance Minister Nirmala Sitharaman presented a bill on taxation and other laws (amendments) in Parliament on Tuesday, which proposes to repeal restrictions preventing banks and payment service providers from charging MDR on notified electronic payments. Nevertheless, this regulation pertains exclusively to business matters, not all users.

Since this concerns trade-related transactions, ordinary users will not feel the impact of this change. Therefore, the probability that this will affect daily purchases of items such as milk, vegetables, groceries, as well as taxi and auto-rickshaw fares, is extremely low. Despite this, much misinformation is circulating on social media claiming that this rule will apply to all users.

According to some reports based on sources, this proposal specifically targets commercial operations exceeding 2000 rupees and large commercial establishments. Transactions between consumers (Consumer to Consumers) will be exempt from collection. Thus, ordinary users can make payments exceeding 2000 rupees without any charges. The standard UPI limit is 1 lakh rupees per day, and in some special categories (such as hospitals, education, taxes), this limit can be significantly higher.

The MDR fee is a charge that businesses must pay to payment service providers and banks for conducting digital transactions. It is evident that this fee will apply to traders, not to regular UPI users. Initially, this step was planned for launch in January 2020 but was suspended by the government to stimulate digital payments.

The main burden will fall on banks, UPI service providers, the payment ecosystem for traders, and sellers accepting small payments through BHIM-UPI, as incentives are provided specifically for these transactions. According to statistics, 95 percent of transactions are amounts less than 2000 rupees, while only 5 percent exceed this amount. This means that this fee will only apply to these 5 percent of trade transactions.