As India introduces a Merchant Discount Rate (MDR) for certain UPI transactions, a potential loophole involving repeated small payments is emerging, but experts warn it carries significant risks for consumers.
Understanding the New UPI MDR
From October 15, person-to-merchant (P2M) UPI transactions exceeding ₹2,000 will incur an MDR of 0.4%. For larger transactions above ₹75,000, a maximum MDR of ₹300 per transaction will apply. Importantly, payments up to ₹2,000 and all person-to-person (P2P) transfers remain exempt from these charges.
This new structure has led some consumers to consider splitting larger bills into multiple ₹2,000 payments to bypass the MDR. For instance, a ₹6,000 bill could be paid via three separate ₹2,000 UPI transactions, each falling below the MDR threshold.
The Risk: Bank Fraud Monitoring Systems
While technically permissible at the individual transaction level, repeatedly making identical UPI payments to the same merchant in quick succession could trigger a bank’s automated fraud-monitoring systems. Adhil Shetty, CEO of BankBazaar, noted that despite no official National Payments Corporation of India (NPCI) cap on such splits, banks continuously track transaction patterns.
“This may result in temporary transaction blocks or suspension of UPI services. Additionally, most bank accounts have a standard daily transaction count limit, meaning a consumer could exhaust their allowed daily transfers very quickly,” Shetty explained.
Such patterns, even if intended to avoid MDR, can appear unusual and lead to security checks, operational restrictions, or even temporary suspension of UPI services for the user.
Merchant Discretion and MDR Clarification
The current framework does not explicitly forbid customers from making multiple smaller UPI payments for a single purchase. However, merchants are not obliged to accept them. Prabhat Ranjan, Senior Director at Nexdigm, emphasized that the commercial transaction should dictate the payment arrangement, not the MDR threshold.
Merchants may require a single payment against one invoice for reasons such as accounting, reconciliation, managing refunds, or fraud control. Furthermore, it is crucial for consumers to remember that MDR is a cost borne by the merchant, not the customer. If a merchant attempts to charge a customer an additional “UPI MDR,” the customer has the right to refuse and report the incident through their UPI application or acquiring bank.
While splitting payments may seem like a clever workaround now, if this practice becomes widespread, the UPI ecosystem may introduce aggregation or anti-circumvention rules in the future to address such patterns. For now, the primary risk lies with banks' vigilant fraud systems identifying unusual transaction behavior.