Government considers two options for reducing UPI-related costs: restoring MDR or a multi-tiered incentive system

The UPI system in India, which has been operational for a year, has evolved from initial user confusion to becoming an indispensable tool, especially during the lockdown. Today, UPI is not just a convenience but a necessity for most citizens, as the use of cash has decreased for both small purchases and online shopping.

The Unified Payments Interface (UPI) system has gained widespread global recognition, with the government playing a significant role in its development. To stimulate digital payments and promote UPI and RuPay cards, the government introduced a 'zero MDR' (Merchant Discount Rate) policy starting January 1, 2020, making UPI usage free for all merchants.

However, there are currently intensifying debates about the possible reintroduction of MDR on UPI transactions. The government is developing a legal framework to introduce a limited fee (MDR) on large transactions for select merchants, taking into account the costs incurred by banks and fintech companies for server maintenance and loss coverage. Questions are arising regarding the reasons for this move, potential external pressure, and the consequences for ordinary consumers.

Nevertheless, the government has emphasized that transactions through UPI will remain free for regular consumers. The fee will apply exclusively to transactions involving large traders/stores; meaning, the MDR falls on the seller, not the customer. Finance Minister Nirmala Sitharaman stated in parliament that the MDR commission will only apply to merchants, while UPI usage for the public will remain completely free. She also clarified that the final decision on introducing or the rate of MDR has not yet been made and will be reviewed by the 'UPI and Services Management Committee' within NPCI.

The government's argument is that implementing MDR will strengthen the digital infrastructure and provide financial support to payment aggregators for new investments. Since banks and fintech companies spend vast sums processing millions of UPI transactions, and zero MDR negatively impacted their business model, introducing MDR is intended to generate revenue to bolster these companies.

MDR is defined as the fee paid by a merchant to banks and payment service providers such as PhonePe, Paytm, and Google Pay for accepting digital payments from customers.

Brokerage firm Jefferies predicts that if an MDR commission of between 0.15% and 0.30% is introduced on large transactions exceeding 2000 rupees, the majority of the revenue will go to companies connecting sellers. This would significantly improve the financial health and income of payment aggregators like Paytm, PhonePe, and Google Pay.

At the same time, the economic research center Global Trade Research Initiative (GTRI) believes that India should not succumb to external pressure regarding its digital payment system. GTRI notes that Indian systems, such as UPI and RuPay, have successfully steered digital transactions onto a new path, and changing the system to accommodate the interests of foreign companies is undesirable.

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.