UPI incentive cut worries industry again; calls for MDR grow louder

A cut in incentives for promotion of low-value transactions on the Unified Payments Interface (UPI) has raised concerns in the fintech industry, leading to calls for either introducing a merchant discount rate (MDR) on the real-time payments system or expanding the incentive outlay in the next financial year.

 

Industry’s concerns surfaced after the government approved ₹1,500 crore in a scheme for the promotion of low-value BHIM-UPI transactions when made from peers to merchants. This was a substantial cut from the ₹3,268 crore approved in 2023-24 (FY24).

 

“There is still confusion about the latest incentive structure for small and large merchants. Will the structure be uniformly applicable to both offline and online merchants, where spending patterns differ?” a fintech executive of a third party payments company asked, requesting anonymity.

 

The Centre has set an incentive rate of 0.15 per cent for transaction values of up to ₹2,000 made to small merchants, while large merchants in the same value bracket will receive no incentive. For transactions exceeding ₹2,000, there will be no incentive for anyone.

 

“It seems like the structure implies that there will be no incentives for transactions over ₹2,000 for both small and large merchants. A 0.15 per cent structure for values less than ₹2,000 only made to small merchants may not be feasible depending on the kind of large purchases users end up making with UPI these days,” another fintech executive said.

 

These observations come at a time when higher ticket-sized UPI peer-to-merchant (P2M) transactions, which include those of more than ₹2,000, have grown nearly twice as fast as UPI peer-to-peer (P2P) transactions, according to data from the Reserve Bank of India’s (RBI) payment system report.

 

The Payments Council of India (PCI), a representative body for fintech firms, highlighted that ₹1,500 crore in allocated incentives was inadequate and the financial sustainability of payment service providers was at ‘severe risk’.

 

“Given the current state of the payment service, the industry had expected either higher incentives or the introduction of a controlled MDR for large merchants (with a turnover of more than ₹40 lakh), but neither has materialised,” the body said in a statement.

 

It added that the absence of a viable revenue model may prompt fintech players to scale back operations, slow down innovation or reassess their market presence.

 

UPI’s contribution to the cumulative digital payments ecosystem has more than doubled in five years, rising from 34 per cent in 2019 to 83 per cent in 2024, RBI data shows.