What’s the latest development?
Until the Union budget FY22, merchants paid under 1% MDR on transactions, after which the government removed the fee to encourage digital payments. Now, a proposal is being considered to reintroduce MDR for merchants with an annual GST turnover of above Rs 40 lakh. Currently, UPI and RuPay debit transactions are free for all merchants, but a tiered pricing model could be introduced, keeping smaller businesses exempt while charging larger merchants.What is MDR?
MDR, or Merchant Discount Rate, is a fee that businesses pay to banks and payment service providers for processing digital transactions. It is usually a small percentage of the transaction amount, to cover infrastructure costs and operational expenses.
What’s the issue?
The removal of MDR boosted UPI adoption but also cut off a key revenue stream for banks, fintech firms, and payment service providers. As government subsidies for digital payments shrink, banks and payment firms are pushing for MDR to be reintroduced, at least for bigger merchants.
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How much subsidy was provided?
To offset the loss of MDR, the government had allocated Rs 3,500 crore in subsidies to banks and payment companies. However, in the latest Union Budget, this subsidy was cut to Rs 437 crore, significantly reducing financial support for UPI infrastructure and operations.Also Read: Government weighs return of merchant charges on UPI, RuPay
How has UPI grown over the years?
UPI’s share of India’s total payment volume increased from 34% in 2019 to 83% by the end of 2024, according to the latest Payments System Report by the Reserve Bank of India (RBI). In 2018, India recorded 2,057 crore digital transactions, with UPI accounting for 375 crore. By 2024, UPI’s transaction volume rose to 17,221 crore, while the country’s total digital payment volume reached 20,787 crore. The total value of UPI transactions grew from Rs 5.86 lakh crore in 2018 to Rs 246.83 lakh crore in 2024, making it the most dominant payment method in India, ahead of credit and debit cards.
How were payment companies impacted?
With zero MDR on UPI, banks, fintech firms, and payment aggregators lost a major revenue stream that they would typically earn from processing digital transactions. This has led to lower investments in payment infrastructure and a shift to alternative revenue models as companies introduced services like subscription-based features, credit-linked UPI offerings, and value-added services to compensate.
What does this mean for the payment ecosystem?
Reintroducing MDR for large merchants could bring back a steady revenue stream for banks and payment firms, potentially leading to more investment in digital infrastructure. However, it could also increase costs for businesses, influencing how they accept digital payments. Smaller merchants, if exempt, would continue to benefit from zero charges, keeping digital adoption accessible.
