A new Merchant Discount Rate (MDR) of 0.4% on Unified Payments Interface (UPI) transactions exceeding ₹2,000 for merchants is set to take effect on October 15, prompting significant concerns from India's retail sector. The charge will be capped at ₹300 for transactions of ₹75,000 and above. Notably, everyday person-to-person UPI payments and small-value merchant transactions remain exempt from this new fee.
Impact on Small Merchants and Digital Adoption
The Retailers Association of India (RAI) has voiced strong objections, highlighting the potential for this new cost to disproportionately burden small and micro, small, and medium enterprise (MSME) retailers, who often operate on razor-thin margins. Kumar Rajagopalan, CEO of RAI, warned that the MDR could create a direct incentive for these merchants to revert to cash payments, thereby undoing years of progress in digital payment adoption across India, particularly as the critical festive season approaches.
The Clothing Manufacturers Association of India (CMAI) echoed these concerns, with President Santosh Katariya stating that the timing of the MDR rollout could not be worse for an industry preparing for peak festive sales. He emphasized that any increase in the cost of accepting digital payments should be carefully considered during such a crucial period for retailers.
Threat to Formalization Efforts
Beyond the immediate financial strain, RAI also raised concerns that a shift away from digital payments towards cash transactions could undermine the government's broader formalization agenda. UPI payments generate traceable digital records, contributing to formal economic activity and enabling tax collection. Rajagopalan argued that UPI acceptance should be incentivized, not taxed, to support these formalization efforts.
Questions on MDR Rationale and Call for Support
The association further questioned the rationale for applying MDR to bank-to-bank UPI transactions linked directly to savings or current accounts. RAI contends that these differ fundamentally from credit-linked payments, where the associated costs and risks might justify a fee. They argue that the cost structure for direct bank transfers via UPI does not resemble a credit product.
RAI has called for the government or the Reserve Bank of India (RBI) to underwrite the costs of maintaining the UPI infrastructure, rather than placing this burden on merchants. The association plans to engage with the National Payments Corporation of India (NPCI) and the Ministry of Finance to address these issues, advocating for a graded MDR structure that differentiates between debit-linked and credit-linked UPI transactions, alongside incentives for small retailers.