Debit card rule may act as template to shield UPI users from MDR fee

A 2017 RBI rule barring merchants from passing debit card MDR to customers could guide safeguards against similar charges on UPI payments

A 2017 Reserve Bank of India (RBI) rule that bars merchants from passing debit card fees onto customers could become the template for shielding Unified Payments Interface (UPI) users from merchant discount rate (MDR) fee, according to sources.

The National Payments Corporation of India (NPCI) is exploring the addition of a similar clause to its UPI circular, though enforcement would ultimately rest with the RBI, one of the sources said. 

This comes at a time when there are concerns that merchants could pass on UPI-MDR fees to customers in the absence of a specific rule and enforcement mechanism. 

In a December 2017 circular on rationalisation of MDR for debit card transactions, the central bank mentions: “Banks are also advised to ensure that merchants onboarded by them do not pass on MDR charges to customers while accepting payments through debit cards.” 

 

Unlike debit cards, UPI has no rule yet protecting users from MDR fees. Since the real-time payment rail has been completely free of MDR fees for the past six years, no such safeguard was stipulated. 

“Similar principles will apply to UPI that exist (for debit cards). Since the provision already exists for a payments instrument, a similar framework could be included in UPI circulars. But, enforcement of the rule has to be done by the RBI,” the source cited above said. 

Emails sent to the NPCI and the RBI on the matter did not elicit any response till press time. 

“While there is no framework today that suggests MDR costs cannot be passed on by merchants to customers for UPI transactions, there is a precedent for it. However, it will only become clear once the government policy comes through, even though the finance ministry has clarified the situation,” said Vishal Jain, founder and senior partner, Ayaam Legal. 

He explained that while MDR costs are not passed on to users, confusion persists because merchants often levy convenience fees on consumers, which are entirely separate from MDR. 

In the past few weeks, Finance Minister Nirmala Sitharaman and the Payments Council of India (PCI) have clarified that any MDR on UPI will only be applicable to merchants. The PCI had earlier stated that small merchants could continue to accept UPI for free. 

A potential MDR on UPI is only being considered for large merchants. Once the government issues the gazette notification, the NPCI-headed UPI and the Services Steering Committee will meet to decide the structure of the MDR, another source said. 

Even if the rule is implemented, enforcement is likely to be a challenge, a fintech founder said on the condition of anonymity. 

“It’s not hard to extend the provision which exists for debit cards to UPI. Acquiring banks will only address an issue if a customer complains that a merchant is passing on costs. While acquirers are technically liable to reverse charges and potentially off-board non-compliant merchants, strict enforcement is unlikely since banks are protective of their own acquiring business,” the person said.