Government's Plan to Reintroduce Merchant Discount Rate (MDR) on UPI and RuPay Debit Card Payments

The government is reportedly considering the reintroduction of merchant charges for UPI and RuPay debit card transactions, a move that could impact large businesses but not consumers. This proposal, which has been discussed among key industry players, comes after the previous abolition of the Merchant Discount Rate (MDR) in 2022. MDR charges were previously levied on merchants for processing payments via UPI and RuPay, though this waiver has led to the rapid adoption of UPI. In this article, we explore the potential effects of this proposed policy change and its broader implications.

A Shift in the Payment Landscape

Since 2022, businesses in India have not had to pay fees when customers use UPI or RuPay debit cards. Prior to this, the Merchant Discount Rate (MDR) was a fee that merchants had to pay for processing such payments, which was generally less than 1% of the transaction value. However, this was waived by the government to promote the adoption of digital payments and boost UPI’s widespread use.

Now, according to reports from senior bankers, the government is considering the reintroduction of the MDR on UPI and RuPay debit card payments. If implemented, this move would not directly affect consumers, as they would still be able to make payments without incurring additional charges. However, it would impact large businesses, which already pay MDR on payments made through Visa, Mastercard, and credit cards.

The Proposal and its Rationale

The formal proposal to bring back the MDR for UPI payments for large merchants has been sent to the Union government, and key departments are reviewing the suggestion positively. The proposal comes as large merchants, who are already paying MDR on other payment platforms, such as credit card companies and Visa/Mastercard debit cards, may be required to also pay for UPI and RuPay debit card transactions.

The rationale behind this proposal is that if these businesses are already paying MDR for card-based transactions, they should also contribute to the costs associated with UPI and RuPay transactions. As UPI has become the most widely used payment method, especially in retail, industry stakeholders feel that the MDR waiver should no longer apply to all merchants.

Arguments in Favor of MDR Reintroduction

Fintech companies, represented by the Payments Council of India, have argued that large businesses should be able to absorb a small fee for processing UPI and RuPay payments. These companies, which include banks and payment service providers, have highlighted that the government is currently subsidizing these costs using taxpayer money, which is unsustainable in the long term.

Vishwas Patel, chairman of the Payments Council of India, has pointed out that businesses in the fintech sector are facing increasing compliance costs due to new regulations, and the lack of an MDR on UPI transactions makes it difficult for companies to stay profitable. With the government’s payments subsidy being reduced significantly in the 2025 budget—from ₹3,500 crore to ₹437 crore—the industry is pushing for the reintroduction of MDR to offset these rising costs.

What Undercode Says:

Reintroducing the Merchant Discount Rate (MDR) on UPI and RuPay payments is a contentious issue. On one hand, it’s understandable why the fintech industry and large merchants want to reintroduce the fee: businesses are under financial strain due to rising operational costs and the reduction in government subsidies. At the same time, UPI has become an essential part of India’s digital infrastructure, and the removal of MDR in 2022 was a crucial step in making it accessible to all users. It helped foster widespread adoption and significantly reduced friction for small businesses.

However, the argument that large businesses should contribute to the costs of processing payments makes sense from an economic standpoint. These businesses already pay MDR on card-based transactions, so asking them to pay MDR on UPI transactions may be seen as a natural extension. Still, there’s the question of fairness. Why should large businesses be subjected to the same costs as smaller ones that may struggle with payment infrastructure?

A key aspect here is the broader impact on the consumer. Although the MDR charge would not directly affect the end-user, businesses may decide to pass on these costs in other ways, such as increasing prices for goods or services. This could hurt consumer wallets and could disrupt the balance that UPI has created in the retail market.

Additionally, we must consider the broader implications for India’s fintech ecosystem. The government’s drastic cut in the subsidy for digital payments processing raises concerns about the viability of fintech companies. The sector has already seen significant consolidation, and these companies have increasingly relied on government support to survive in a competitive market. The reintroduction of MDR could stabilize the financial health of payment providers but might stifle innovation and competition in the long run.

Ultimately, this decision hinges on striking a balance between supporting the fintech ecosystem and ensuring that the advantages of digital payments continue to benefit all sectors of the economy, including the consumer.

Fact Checker Results:

MDR Reintroduction: The government is seriously considering bringing back MDR charges for large merchants on UPI and RuPay payments.
Impact on Consumers: Consumers will not directly bear the costs of MDR, as the charges will apply only to merchants.
Government Subsidies: The government’s subsidy for digital payment processing has been drastically reduced in the latest budget, pushing the industry to seek alternate funding sources like MDR.

References:

Reported By: https://timesofindia.indiatimes.com/technology/tech-news/government-weighs-return-of-merchant-fees-on-upi-rupay-transactions-what-it-may-mean-for-users/articleshow/118871785.cms
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