[Update] Now, SPF Joins PCI’s Bid To Reinstate MDR On UPI, RuPay Transactions

Update | March 26, 3:25 PM

A couple of days after the Payments Council of India (PCI) sought reinstatement of merchant discount rate (MDR) on UPI payments and RuPay transactions, recently formed startup body Startup Policy Forum (SPF) has announced its support to the PCI’s proposal. 

“The two-tiered model of MDR ensures this balance by exempting small merchants from the proposed MDR framework and preserving the extant zero MDR framework for them. This distinction will also ensure the long-tail of small value merchants have adequate impetus to up-ramp and experience digital payments acceptance ensuring UPI witnesses the next wave of growth,” the SPF said in a statement. 

Founded in December 2024 by ex-Peak XV exec Shweta Rajpal Kohli, the SPF is a body of Indian startups that aims to enable collaboration between founders, policymakers and regulators. It counts the likes of Razorpay, CRED, Groww, Zerodha, Swiggy, Dream11, among others, as its members.

Original | March 24, 10:00 PM

Following the Centre’s decision to cut the incentives for low-value UPI (person to merchant or P2M transactions) for the financial year 2024-25 (FY25), industry body Payments Council of India (PCI) has written to Prime Minister Narendra Modi to introduce MDR (merchant discount rate) on UPI and RuPay transactions.

In its letter to the PM, the industry body has sought an urgent reconsideration of the zero MDR policy and called for levy of MDR on UPI for large merchants.

This comes after the Union cabinet, last week, announced an incentive of INR 1,500 Cr for UPI P2M transactions of up to INR 2,000 for FY25. This was a decline of nearly 60% from INR 3,500 Cr allocated for these transactions in FY24.

Formed under the aegis of the Internet and Mobile Association of India (IAMAI), the PCI represents the country’s digital payment players. It counts Airtel Payments Bank, Amazon Pay, Google Pay, Cashfree, Jio Payments Bank, among others, as its members.

Meanwhile, MDR is a fee that merchants and other businesses pay to a payment processing company (Phonepe, Paytm, et al) for digital transactions. It is charged as a percentage of the transaction amount.

In a bid to promote digital payments, the Centre introduced a zero MDR regime in January 2020 for UPI and RuPay transactions. The players in the UPI ecosystem are barred from charging any MDR, and the Centre incentivises low-value transactions for small merchants by paying the incentive amount to the merchants’ acquiring bank. This amount is then shared among all stakeholders involved in the transactions.

The PCI’s Demands: In its letter, the PCI said that the allocation of INR 1,500 Cr in incentives barely covers a fraction of the estimated INR 10,000 Cr annual cost required to maintain and expand UPI services. 

While the body has not called for an increase in the allocation, it has proposed an introduction of a MDR of 0.30% for UPI only for large merchants. For RuPay card transactions, it has proposed a 0.30% MDR structure for merchants of all sizes. 

It is pertinent to note that the Reserve Bank of India (RBI) defines merchants with an annual turnover of up to INR 20 Lakh as small merchants. 

In its rationale for the proposal, the PCI said that more than 90% merchants will not be affected if MDR of 0.30% is levied on large merchants. It said that enabling MDR for RuPay debit cards and UPI for large merchants will ensure sustainable monetisation for service providers without disrupting digital payment adoption at the grassroots level. The industry body estimates that out of the 6 Cr merchants in the country, only 50 Lakh qualify as large merchants.

Before the Centre introduced the zero MDR regime, 0.3% MDR was levied on UPI P2M transactions. Meanwhile, MDR of up to 0.90% is charged across all card networks for debit cards.

To make up for this, the Centre’s incentive to promote digital payments stood at INR 957 Cr in FY22. However, it was increased to INR 1,802 Cr in FY23 and subsequently to INR 3,268 Cr in FY24.

In line with this, the payments industry was expecting the incentive amount to breach the INR 5,000 Cr in FY25, PCI chairman and joint MD of fintech Infibeam Avenues, Vishwas Patel, said. 

“With increasing deployment and servicing costs as well as increasing RBI compliances costs, it (the lower incentives) will choke the growth. We don’t want to survive on government incentives. The only solution is for the government to allow us to charge a low controlled MDR of 30 basis points on UPI P2M transactions only for merchants with more than INR 20 Lakh turnover,” he added. 

Under the incentive scheme, the Centre allows a 0.15% incentive payout to small merchants for transactions up to INR 2,000. For larger merchants, the incentives stand at zero. 

Why Does MDR Matter?: The payments industry argues that MDR helps it innovate and recover the cost of running the digital payments infrastructure smoothly. With the MDR out of the picture, the industry relies solely on the incentive scheme to support the digital payments ecosystem. 

As a result, there have been recurring demands for restoration of MDR on digital transactions. Most recently, it was reported that bankers put forth a formal proposal to the government to bring back MDR on UPI payments for large merchants whose annual GST turnover exceeds INR 40 Lakh. 

Last year, Amazon Pay India CEO Vikas Bansal also called for “some sort” of MDR for UPI payments, saying it is essential for smaller players to “receive a fair share for the value they add to the payment ecosystem”.

The PCI, in its statement today, said that the introduction of a reasonable MDR for large merchant transactions will allow the industry to continue investing in innovation, cybersecurity, grievance redressal, and merchant support, ultimately ensuring that UPI continues to thrive. 

“MDR is the lifeline of the digital payments ecosystem. Without it, the sustainability of the entire infrastructure is at risk,” it added.