The Indian government is considering bringing back the Merchant Discount Rate (MDR) on select Unified Payments Interface (UPI) transactions, which will reshape the country’s digital payments ecosystem.
And while no final decision is made, discussions have intensified after banks and payment service providers said the current zero-MDR framework is financially unsustainable.
MDR is a fee paid by merchants to banks and payment service providers for processing digital transactions. In 2020, the government abolished MDR on UPI and RuPay debit card payments to encourage digital adoption. UPI is now the most popular payment channel in India with billions of transactions every month.
Yet payment companies say that maintaining the UPI infrastructure without a revenue stream has become increasingly difficult. Processing, cybersecurity, fraud prevention and technology upgrades need investment on a long-term basis for a sustainable business model.
Who Could Be Affected
There are talks that large merchants might be the first to face MDR if it is reintroduced. Businesses with higher annual turnover could be required to pay a small transaction fee while small merchants and neighbourhood stores continue to benefit from zero-MDR. Businesses with annual GST linked turnover above ₹40 lakh could fall under this proposed plan.
For consumers, there is no indication that UPI users will be charged directly. The proposed MDR has been put forward as the merchants and not the customers are liable to pay for it. Some businesses may eventually incorporate these costs into product pricing, however.
Why is MDR being considered
Banks and fintech firms have repeatedly stressed that they get little government support to help promote the rapidly growing UPI ecosystem. As digital payments have become more prevalent, they say, the subsidy is insufficient to cover operational costs.
Experts believe that a tiered MDR system targeting only larger businesses would strike a good balance between making digital payments available to small businesses and keeping payment companies financially viable.
Government yet to Take Final Call
At present the proposal is still in discussion. Previous reports for immediate UPI charges were denied by the Finance Ministry, which has said it would continue to promote digital payments. Any changes to MDR policy would probably require discussions with banks, fintech companies, merchants and regulators before implementation.
If approved, it would be one of the biggest policy changes in India’s digital payments landscape since zero-MDR was introduced. Businesses like large retailers and e-commerce platforms are closely watching the government’s move as it could affect payment costs and digital payment strategies across sectors.
For now, transactions on UPI are still free to users and merchants under the current policy, and the government is not giving a date for the change.
