A recent LocalCircles survey indicates that the potential reintroduction of Merchant Discount Rate (MDR) on certain Unified Payments Interface (UPI) transactions could significantly alter India's digital payment habits. The findings suggest that if large merchants were to pass on MDR charges to customers for UPI payments exceeding ₹3,000, a substantial number of users would likely opt for alternative payment methods, primarily credit and debit cards.
Users Eye Alternatives Amid Fee Concerns
According to the survey, more than half (53%) of UPI users stated they would shift away from the platform for higher-value transactions if an MDR were applied and recovered from consumers. Specifically, 27% indicated a preference for credit cards for most transactions above ₹3,000, while 14% would choose debit cards. An additional 12% would revert to cash or direct bank transfers, collectively forming the majority who would abandon UPI for these transactions.
Conversely, only 12% of respondents said they would continue using UPI even if they had to bear the fee. Another 18% would only continue if the merchant absorbed the cost. The survey also highlighted that nearly half of all respondents (49%) would avoid making purchases above ₹3,000 through UPI entirely if merchants began recovering the transaction fee from customers.
Legislative Changes Pave the Way
This potential shift in user behavior is being discussed amidst the Finance Ministry's proposal to amend the Payment and Settlement Systems (PSS) Act, 2007. Crucially, this amendment does not immediately introduce MDR on UPI transactions or impose new charges. Instead, it seeks to replace the current blanket exemption in Section 10A with a framework that would empower the Central Government to decide, through future notifications, which digital payment modes remain exempt from charges and which could attract MDR.
Legal experts describe this as an enabling provision, granting the government flexibility to prescribe MDR on UPI transactions at a later stage, should it choose to do so. Any actual implementation of charges would still require separate notifications specifying the payment modes, transaction types, and applicable MDR rates.
Sustaining UPI Growth
The proposed legislative change comes as UPI continues its rapid expansion. In July, the platform recorded an impressive 23.66 billion transactions, totaling ₹29.88 lakh crore. This escalating volume has intensified the debate around the sustainability of the zero-MDR regime, as banks and payment service providers incur significant costs for infrastructure, cybersecurity, and technology.
Industry participants have voiced concerns that the government's incentive scheme, introduced after MDR was removed in 2020, does not fully cover these operational costs. While analysts anticipate that any future MDR, if introduced, would likely target higher-value merchant transactions while protecting small merchants and consumers, the government has yet to announce any specific proposals.