Proposed merchant discount rate (MDR) framework for Unified Payments Interface (UPI) transactions needs to be rationalised before implementation to protect public trust in the digital payments system, according to a report.
UPI, a public digital infrastructure, has generated significant convenience for users and productivity gains for the economy, with its long-term economic benefits outweighing the incremental income that could accrue from merchant transaction fees, the report titled ‘UPI at a Crossroads: Reintroducing the MDR’ released by IIT Bombay said.
It cautioned that public trust in UPI could be undermined if the proposed MDR framework is implemented in its present form, stressing the need to ensure that the digital payments platform does not attract negative sentiment among users.
The report suggested that merchants with annual turnover of Rs 50 crore or more are mandated by law to provide UPI as a means for accepting payments.
Accordingly, the remuneration for the UPI ecosystem can be harnessed by restricting it only to merchants with annual turnover of over Rs 50 crore (about 4 crore per month), it said, adding that this would account for about 90 per cent of NPCI’s proposed MDR.
There is a potential for NPCI to introduce a reasonable charge on merchants, within the legal mandate, across all online person-to-merchant (P2M) UPI transactions, it noted.
“Such a charge imposed on e-commerce merchants, who cannot transact in cash (cash-on-delivery is more UPI-on-delivery options now), would be more in line with online merchants’ digital payment facilitation fee. Such a fee can provide remuneration to all the providers of the UPI ecosystem, including banks,” it said.
The report argued that the proposed framework should be tweaked and rationalised to strike a balance between generating revenue to support UPI’s future expansion, preserving its accessibility and acceptance among users and merchants.
It also emphasised that the broader economic benefits of UPI, including productivity gains and convenience for the public, should be taken into account while framing the fee structure.
As per the National Payments Corporation of India (NPCI) circular issued last month, a 0.4 per cent Merchant Discount Rate (MDR) will apply to person-to-merchant (P2M) UPI payments above Rs 2,000. The charge will be paid by merchants, not consumers and capped at Rs 300 for transactions of Rs 75,000 or more.
Payments between individuals, as well as the vast majority of everyday merchant payments, will remain free.
Essential services, such as railways, telecom, fuel, and insurance, will attract a flat Rs 5 fee per transaction above Rs 2,000. Capital markets transactions (mutual funds, stockbroking) get a lower 0.02 per cent rate, also capped at Rs 300.
The NPCI, which operates the UPI platform, on September 15, issued a circular providing for MDR on certain UPI transactions, with the move aimed at creating a sustainable revenue framework for the digital payments ecosystem.
The report recommended there should be no MDR on debt collection and loan EMI repayments (that may mostly be above Rs 2,000) through UPI.
Keeping credit servicing and loan repayments free from MDR purview would support financial inclusion, make digital debt repayment more cost-effective than cash/cheque and prevent avoidable financial frictions for borrowers, it said.
It also emphasised that the Reserve Bank should decide on MDR for UPI within the Payment and Settlement Systems Act, 2007.
