Understanding UPI's New MDR Structure
The introduction of a Merchant Discount Rate (MDR) on certain UPI transactions has prompted questions about the cost-effectiveness of India's popular digital payment system for businesses. While a 0.40% MDR now applies to specific Person-to-Merchant (P2M) transactions exceeding ₹2,000, an analysis by Motilal Oswal Financial Services (MOFSL) indicates that UPI generally maintains a significant cost advantage over traditional credit and debit card payments.
For a standard P2M UPI transaction, the 0.40% MDR kicks in for amounts between ₹2,000 and ₹75,000. Transactions of ₹75,000 or more also incur a 0.40% rate, but with a maximum charge capped at ₹300.
Comparing UPI, Credit, and Debit Card Costs
When comparing the charges, UPI's standard 0.40% MDR is notably lower than card rates. Credit card transactions typically range from 1.5% to 2.5%, while debit card charges can go up to 0.90%.
- For a ₹10,000 payment: UPI MDR would be ₹40. A credit card transaction could cost ₹150–₹250, and a debit card up to ₹90.
- For a ₹100,000 payment: UPI's 0.40% would mathematically be ₹400, but the ₹300 cap makes it significantly cheaper. Credit card charges for the same amount could be ₹1,500–₹2,500, and debit cards up to ₹900.
Special Rates for Key Sectors
UPI's framework also includes reduced or fixed rates for specific sectors, further enhancing its appeal for merchants in these areas:
- Essential Services: Payments above ₹2,000 for railways, telecom, insurance, fuel, agricultural inputs, and utility bills attract a flat MDR of just ₹5. This means a ₹10,000 payment in these categories effectively has an MDR of only 0.05%.
- Capital Markets: Transactions for mutual funds, securities, stockbrokers, and dealers benefit from an even lower MDR of 0.02%, also capped at ₹300. A ₹10,000 transaction would cost only ₹2, while a ₹1 lakh payment would be ₹20.
Transactions Remaining MDR-Free
It's important to note that a large portion of UPI transactions remain exempt from these new MDR charges:
- Person-to-Person (P2P) payments: These continue to have 0% MDR.
- P2M transactions up to ₹2,000: These also remain free of MDR.
- Small Merchants: Eligible small merchants under the P2PM framework can continue to receive inward UPI payments up to ₹1 lakh per month without any MDR, even if individual payments exceed ₹2,000.
MOFSL estimates suggest that while only about 4% of UPI transactions by volume might incur MDR, these could account for 15–20% of the total UPI merchant Gross Merchandise Value (GMV) due to the charge being tied to transaction value. Overall, the data confirms that despite the new MDR, UPI largely maintains its cost advantage for merchants compared to card-based payment systems.