MDR on UPI payments: Will India return to cash?
The central government’s decision to impose a Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions for merchants has raised concerns about a cash return.
The Finance Ministry clarified that MDR is neither a tax nor a charge collected by the government or the National Payments Corporation of India (NPCI). It is distributed among payment ecosystem participants, including banks and payment application providers, to support the operation and continued expansion of the UPI ecosystem.
Though it is not a charge on customers making UPI payments, there are concerns that merchants may pass MDR charges on to customers.
Many may return to cash: Former BharatPe CEOSpeaking to the media, former BharatPe CEO Ashneer Grover said that due to the introduction of MDR on UPI, people may start returning to cash.
He also expressed concerns that merchants may ask customers to pay an extra amount in case of UPI payments, thereby either forcing customers to shift to cash or bear the extra burden.
According to him, UPI must remain free forever, as imposing MDR on it will lead to an increased burden on bank ATM infrastructure due to expected increased cash usage.
MDR on UPI paymentIt is going to be 0.4 per cent of the transaction amount that merchants need to pay to banks from October 15.
However, it will be charged only on transactions valued over Rs 2,000. Moreover, the maximum MDR per transaction can be Rs 300.
Though the MDR charges will be levied on person-to-merchant (P2M) transactions, there will be no fee for person-to-person (P2P) transactions.
In order to safeguard small merchants, the government made a provision that those who are receiving up to Rs 1 lakh per month will be placed under the P2PM category. Under the category, no MDR will be collected irrespective of the amount per transaction.
Revenue generated from MDR will support banks, payment service providers and UPI application providers in expanding and improving payment infrastructure, including in rural and semi-urban areas.
Capital market transactionsFor the money transferred to investment platforms in order to invest in mutual funds or the stock market, the MDR charges will be 0.02 per cent. It is also capped at Rs. 300 per transaction.
Thin-margin sectors, including railways, telecommunications, insurance, fuel and agricultural inputs, will attract a flat MDR of Rs 5 per transaction.
As per NPCI, which is an Indian public sector company that operates retail payments and settlement systems in India, more than 95 per cent of the UPI P2M volume is up to Rs. 2,000.
Though it is true, value-wise, P2M transactions represent 67 per cent.
There are apprehensions that P2M transactions valued at about Rs. 2,000 may decline as customers may be forced to either make huge payments in cash or split the payments into multiple transactions valued at up to Rs 2,000.
Moreover, as there are concerns about an increase in cash usage, it will put a burden on bank ATMs.
Political reactions on MDR for UPI paymentsLeader of the Opposition in the Lok Sabha, Rahul Gandhi, on Tuesday lashed out at the Centre over its decision.
In a post on X, Rahul Gandhi said: “The Modi government has quietly opened the door to imposing fees on UPI.”
“Now, MDR can be levied on merchant UPI transactions above Rs. 2,000. Even if these transactions account for just 5% of the volume, they make up nearly 65% of UPI’s total transaction value,” he said.
Gandhi said, “But where will the fees imposed on shopkeepers ultimately come from? Added to prices, straight out of the customer’s pocket.”
“American payment companies have long opposed India’s zero-MDR policy. Now, the Modi government has opened the path to changing the policy in exactly that direction,” the Congress leader alleged.
Telangana Chief Minister A Revanth Reddy said on Tuesday that increased MDR on merchant UPI transactions above Rs 2,000 threatens India’s zero-MDR digital payment model.
“The BJP Government may claim that customers will not be charged directly. But if merchants are forced to pay, the cost will ultimately be passed on to the common consumer through higher prices,” the Chief Minister said in a post on X.
“Why should small businessmen and the common man bear the burden of increased digital payment costs?” asked CM Revanth Reddy.
“There must be immediate clarity on the UPI (Unified Payments Interface) policy, with a permanent commitment to protecting UPI transactions from increased MDR. Keep UPI ZERO-MDR,” he added.
Uttar Pradesh Minister Sanjay Nishad on Wednesday said such charges should not be increased as they could add to the burden on consumers.
Speaking to reporters, Nishad said, “Today, there are international issues, whether related to inflation or anything else. We feel that such charges should not be increased. Under what circumstances has it been increased? Since it affects customers and the public. Today, there is democracy in the world. Democracy always means reducing the burden, providing opportunities and facilities, and ensuring that people do not face any kind of hardship. Rather, democracy is the name of medicine for hardship.”
Though MDR may not result in a complete shift from UPI to a cash economy, there might be an impact on cashless transactions, at least in the short run.
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