KKN Gurugram Desk | In a significant move, the Digital Payments Council of India (DPCI) has written to Prime Minister Narendra Modi requesting the implementation of a Merchant Discount Rate (MDR) of 0.3% on UPI (Unified Payments Interface) transactions. This development has sparked heated debates among users, with many expressing concerns over potential costs, fearing that such a fee could lead to a decline in the use of UPI. Additionally, DPCI has also suggested introducing MDR on RuPay debit card transactions. The proposal has raised questions about the future of digital payments in India, especially considering the rapid growth UPI transactions have experienced in recent years.

What Is MDR and How Does It Affect UPI Transactions?

Merchant Discount Rate (MDR) is the fee that merchants pay to banks or payment service providers for processing digital payments. The fee is typically a percentage of the transaction amount. The implementation of MDR on UPI transactions would mark a significant shift in how digital payments are structured in India. Currently, UPI transactions are largely free of charge, which has contributed to their rapid adoption across the country.

If the proposed MDR of 0.3% is introduced, it could mean that both merchants and consumers might face additional costs. Although the MDR may seem small, it could have a substantial impact on the growing ecosystem of UPI payments, particularly for small businesses and low-value transactions. The Digital Payments Council’s request has drawn mixed reactions from various stakeholders, including users, merchants, and industry experts.

Survey Reveals Concerns Over UPI Fee Implementation

A recent survey conducted by LocalCircles revealed that 73% of UPI users would stop using the payment service if a fee was introduced. The survey also indicated that many users fear merchants might pass on the additional charge to consumers, leading to higher costs for everyday transactions. This could ultimately discourage people from using UPI, which has become a cornerstone of digital payments in India.

The DPCI’s proposal to introduce MDR on UPI transactions is based on the premise that such fees could help balance the growing costs of digital payment infrastructure and encourage the sustainability of payment networks. However, critics argue that introducing fees could undo the progress made in promoting digital payments as a cost-effective, accessible, and user-friendly alternative to traditional cash transactions.

UPI Transaction Growth: A Massive Surge in Usage

In the past five years, UPI transactions have witnessed an impressive growth trajectory. According to the Reserve Bank of India’s (RBI) payment system report, the volume of UPI transactions increased by 89.3%, while the transaction value grew by 86.5%. This growth highlights the increasing reliance on UPI as a preferred method of payment, particularly for everyday expenses and small-ticket transactions.

UPI’s contribution to India’s overall digital payment ecosystem has grown significantly, from 34% in 2019 to an estimated 83% in 2024. This sharp rise in UPI usage reflects the adoption of digital payments across various sectors, from retail to government services, and underscores the role UPI has played in shaping the country’s cashless economy.

What Are Users Saying About the Potential Fee?

A significant number of users have voiced their concerns about the introduction of an MDR on UPI transactions. Many users believe that if a fee is implemented, it could severely hamper the widespread adoption of digital payments, particularly in rural areas where UPI has become a convenient and low-cost method of conducting financial transactions. Some users have also expressed frustration over the potential for merchants to pass on the MDR charge to customers, further increasing the financial burden on consumers.

According to the LocalCircles survey, a majority of respondents (73%) have stated they would discontinue using UPI if the MDR was implemented. Others have suggested that merchants might absorb the cost of the fee, but this could result in higher prices for goods and services, potentially impacting the affordability of digital payments for lower-income consumers.

The Debate Over MDR on RuPay Debit Cards

In addition to the request for MDR on UPI transactions, the Digital Payments Council of India has also suggested applying MDR to RuPay debit card transactions. RuPay, India’s indigenous card payment system, has seen rapid growth and adoption across the country. The introduction of MDR on RuPay transactions could create additional challenges for consumers and merchants who rely on low-cost digital payment options.

The proposal to extend MDR to RuPay transactions is part of a broader effort by the DPCI to regulate digital payment fees and ensure the sustainability of payment networks. However, it raises concerns about the potential impact on the affordability of digital payments for consumers, especially considering the role of RuPay cards in promoting financial inclusion.

What Type of Fees Should Be Imposed?

The issue of what type of MDR should be applied has been a point of discussion among industry experts and stakeholders. According to the LocalCircles survey, respondents expressed varying preferences regarding the structure of MDR. Some proposed a fixed fee of 12% per transaction, while others suggested a percentage-based fee, such as 2% of the transaction value. A significant number of respondents (73%) felt that no charge should be imposed, and if it were, they would stop using the service altogether.

There were also respondents who expressed uncertainty about how the fees would be applied. The overall sentiment suggests that many users are uncomfortable with the idea of paying additional fees for digital payments, particularly when they have become accustomed to fee-free transactions on platforms like UPI.

The Impact of Fees on User Behavior

The introduction of MDR could change user behavior in significant ways. As the LocalCircles survey results show, a large percentage of users may abandon UPI altogether if fees are applied. For many users, the lack of fees has been a key selling point for UPI, and the introduction of charges could deter them from using the platform.

Furthermore, if merchants pass on the MDR charges to customers, it could lead to an increase in the overall cost of goods and services. This could disproportionately affect low-income consumers, who may be less willing or able to absorb the additional costs.

How Fees Affect Small Merchants

Small merchants, who rely on digital payments for convenience and efficiency, could also be negatively impacted by the introduction of MDR. Many small businesses have adopted UPI and other digital payment methods due to their low transaction costs. If an MDR is imposed, small merchants may be forced to absorb the costs or pass them on to customers, which could lead to reduced sales and profitability.

Additionally, the increased complexity of managing fees could deter small merchants from continuing to accept digital payments altogether. This could slow down the growth of digital payments in rural areas, where UPI has been particularly successful in driving financial inclusion.

Government’s Stance on MDR

The issue of MDR on UPI transactions first surfaced in August 2022 when the Reserve Bank of India proposed a fee structure for digital payments. However, the proposal was not pursued further, and the government clarified that no charges would be imposed on UPI transactions. The Digital Payments Council’s recent request to reintroduce MDR has reignited the debate on the future of digital payment fees in India.

As the government continues to evaluate the impact of digital payment fees, it must consider the potential consequences for both consumers and merchants. The success of UPI in India has been built on the foundation of low-cost, user-friendly digital payments, and any changes to this model could have significant repercussions for the country’s cashless economy.

The proposal to introduce MDR on UPI transactions is a complex issue that requires careful consideration of various factors, including the impact on users, merchants, and the overall digital payments ecosystem. While the introduction of MDR could help sustain payment networks and improve infrastructure, it could also deter many users from adopting digital payment methods. The government and relevant stakeholders must weigh the benefits and drawbacks of such a policy to ensure that digital payments continue to thrive in India.