In a significant shift for India's digital payments landscape, transactions made through the Unified Payments Interface (UPI) exceeding ₹2,000 to merchants are poised to attract a Merchant Discount Rate (MDR). This development follows a recent notification from the finance ministry, paving the way for the National Payments Corporation of India (NPCI) and its UPI and Services Steering Committee to determine the precise rates and implementation details.
Understanding the New UPI MDR
The Merchant Discount Rate (MDR) is a fee paid by a merchant to the bank for processing a debit or credit card transaction. In this context, it will apply to UPI transactions. Indications suggest an MDR of approximately 0.4% will be levied on eligible transactions. Crucially, this policy aims to differentiate between high-value commercial transactions and everyday consumer payments.
Who Will Be Impacted?
- Merchants: Larger merchants processing high-value UPI transactions (above ₹2,000) are the primary target. The NPCI committee, comprising banks, payment players, and industry bodies, will decide how these costs are distributed among merchants, banks, payment aggregators, and apps.
- Consumers: For the vast majority of consumers and small merchants, the impact is expected to be minimal. Small-ticket payments for groceries, transport, and other daily purchases will remain unaffected, ensuring continued widespread adoption of UPI for everyday use.
It's estimated that roughly 96% of UPI transactions will fall outside the purview of these new MDR charges, with only a small percentage of large merchants being impacted. Data from CareEdge Ratings indicates that while person-to-merchant (P2M) transactions constitute 29% of total UPI transaction value, only about 19.5% of the overall UPI transaction value potentially falls within the new MDR threshold.
Historical Context and Future Revenue
Prior to 2020, MDR was applicable to debit card payments (0.40%-0.90%) and UPI P2M transactions (up to 0.30% with a ₹100 cap). The zero-MDR policy for RuPay debit cards and UPI platforms was introduced in 2020 to accelerate the adoption of digital payments across India.
The reintroduction of MDR on specific high-value UPI transactions is projected to generate substantial revenue. Based on a potential MDR-addressable pool of ₹61.13 lakh crore in FY26, a nominal MDR of 0.25% to 0.50% on select higher-value merchant transactions could generate a gross revenue opportunity of ₹15,000 crore to ₹30,000 crore. This revenue stream is intended to support the infrastructure and growth of the digital payments ecosystem, all while keeping person-to-person (P2P) payments and lower-value merchant transactions free for users.