Earlier this week, the National Payments Corporation of India (NPCI), which operates UPI, announced that an MDR of 0.4 per cent would apply to P2M UPI transactions above Rs 2,000. The charge will be capped at Rs 300 for transactions of Rs 75,000 and above. P2M transactions of up to Rs 2,000 will remain free of MDR, as will peer-to-peer (P2P) transactions such as transfers between family and friends.
The MDR is a fee paid by merchants for accepting digital payments. Brokerage estimates suggest that the return of MDR on UPI transactions after six years could generate Rs 15,000 crore-Rs 20,600 crore in annual revenue for the digital payments and banking ecosystem.
The proceeds will be shared among issuing and acquiring banks, payment service provider (PSP) banks, and third-party application providers (TPAPs) such as Google Pay or PhonePe. Goldman Sachs estimates that 50 per cent of the revenue pool will accrue to issuing banks and PSPs, 20 per cent to TPAPs and 30 per cent to acquiring banks. Citi estimates that banks and UPI handles will capture about 60 per cent, UPI app providers 25 per cent, and non-bank payment aggregators the remaining 15 per cent.
Under the proposed fee structure, a merchant paying the maximum MDR of 0.4 per cent on a Rs 10,000 transaction would pay Rs 40. Of this, Rs 28 would flow to the issuing bank as interchange. The issuing bank would pay Rs 12 to the payer-side PSP, which would in turn pay Rs 8 to the app provider. Thus, after accounting for these payments, the acquiring bank would retain Rs 12, the issuing bank Rs 16, the payer-side PSP Rs 4 and the app provider Rs 8.
The Reserve Bank of India (RBI) backed the move, describing the introduction of MDR on large-value UPI transactions as an important step towards the long-term sustainability of the digital payments ecosystem. It said a fair and appropriate distribution of MDR among ecosystem participants would support continued investment in technology, infrastructure and acceptance networks, which could in turn help widen UPI acceptance and sustain transaction growth.
However, concerns over the impact of the charge on merchants have emerged following the announcement. One issue is that merchants paying MDR would also have to pay 18 per cent goods and services tax (GST) on the charge, increasing the upfront cost of accepting such payments. GST-registered businesses should be able to claim input tax credit on the GST paid, while unregistered merchants may have to bear the cost, experts said.
The Retailers Association of India (RAI) has opposed the reintroduction of the MDR, arguing that the charge could affect digital payment adoption among smaller retailers. It has said it would take up the issue with NPCI and the Ministry of Finance and seek a graded structure that distinguishes between debit-linked and credit-linked UPI transactions, along with incentives to encourage small retailers to remain within the formal payments ecosystem.
Petrol pump dealers have also raised concerns, with associations warning that they could stop accepting UPI payments of Rs 2,000 and above and revert to cash if they are required to bear a flat MDR of Rs 5 per transaction. Dealers have argued that such a charge would put further pressure on their already thin margins.
Stock brokers have separately raised concerns over the MDR applicable to large-value capital-market transactions. The Securities and Exchange Board of India (Sebi) is examining the issues raised by brokers. For capital-market transactions, including payments to mutual funds, securities brokers, dealers and investment advisers, the MDR has been set at 0.02 per cent, capped at Rs 300. Recurring standing instructions and UPI mandates, including those used for mutual fund systematic investment plans, will not attract MDR.
The move has also triggered political criticism. Congress leader and Leader of Opposition in the Lok Sabha Rahul Gandhi has argued that even though customers will not be directly charged, the cost imposed on merchants could ultimately be reflected in prices paid by consumers. His criticism is part of the wider political opposition to the new MDR framework.
A senior private sector banker said merchants were likely to eventually factor the additional cost into their pricing, although the extent to which this would happen would depend on market dynamics. “See, with any such eventual charge, one way or the other, it will eventually be passed on to the customer because it is a cost the merchant will absorb for some time and then eventually find a way to price it in. Lived experience suggests that the market eventually finds a way to price it based on who can pay. I have a feeling that will happen over a period of time,” the banker said.
The larger question, however, is whether the MDR could affect UPI transaction volumes, particularly among smaller merchants. “Some volumes will go down, but you have to remember that transactions above Rs 2,000 are, if I’m not mistaken, a very small percentage in terms of volumes. The remaining transactions remain free. P2P is anyway the biggest category, and even within P2M, most transactions are below Rs 2,000,” the banker said.
“I don’t know how much of an impact this will have in terms of volumes coming down. Some decline could happen because merchants will respond to the charge. There is also the ‘India jugaad’ model — people may start doing Rs 1,700 or Rs 1,990 transactions. All of those things could happen,” the banker said.
On whether the MDR could push consumers towards cash, the banker said a significant shift was difficult to envisage, although merchants could encourage customers to pay in cash by offering discounts.
 "UPI, online payment, UPI apps")