The National Payments Corporation of India (NPCI) has told the Supreme Court that its newly introduced Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions is lawful and essential for sustaining the system, emphasizing that merchants and payment apps cannot transfer these charges to consumers.
- MDR imposed only on UPI transactions above Rs 2,000 capped at 0.4%
- Merchants and UPI apps barred from passing MDR charges to customers
- NPCI to fund digital adoption programs for small merchants
What happened
The National Payments Corporation of India (NPCI) submitted a counter-affidavit to the Supreme Court defending the introduction of a Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions. The charge applies solely to person-to-merchant transactions exceeding Rs 2,000, with a maximum MDR rate of 0.4%. NPCI underlined that UPI application providers and financial institutions are prohibited from levying any additional fees on these transactions.
NPCI further emphasized that merchants cannot pass these MDR charges directly or indirectly to consumers. The entity clarified the framework is binding, with violations potentially leading to suspension of UPI membership or other compliance actions. The introduction of MDR replaces the previous zero-discount-rate model which, according to NPCI, failed to provide sufficient resources for infrastructure investment and security enhancements.
Why it matters
UPI has grown into one of India’s critical payment infrastructures, handling billions of transactions monthly. The zero-MDR regime limited NPCI’s ability to adequately invest in system resilience, cybersecurity, fraud prevention, and customer support. By implementing MDR targeted at higher-value transactions, NPCI aims to create a more sustainable revenue model to maintain and upgrade the UPI ecosystem.
There has been public concern that merchants might raise prices to indirectly recover the cost of MDR, thereby increasing consumer expenses. NPCI dismissed this concern as misplaced, noting that the MDR applies only above a certain transaction threshold and that small merchants generating under Rs 20 lakh annually will be supported through dedicated adoption programs funded by a share of MDR revenues, reinforcing digital inclusion without exclusion.
What to watch next
The Supreme Court’s forthcoming decisions on challenges to the MDR framework will be closely monitored as they will shape the future regulatory landscape of UPI payments. The court will consider the legal basis of NPCI’s MDR imposition, including interpretations of the Payment and Settlement Systems Act and amendments to Section 10A, alongside constitutional challenges raised by petitioners.
Market participants, including merchants and UPI app providers, will also be watching the regulatory enforcement around MDR pass-through prohibitions. The efficacy of NPCI’s small merchant digital adoption programs funded through MDR portions will be a crucial metric for assessing the broader impact on India's inclusive digital payments ecosystem.