The report 'UPI at a Crossroads: Reintroducing the MDR' highlights that while UPI has dramatically enhanced digital payment convenience and economic productivity, the proposed MDR framework requires careful adjustment to avoid eroding public trust and ensure sustainable growth.
- MDR proposed for UPI P2M transactions over Rs 2,000, paid by merchants
- Report advises MDR focus on merchants with turnover above Rs 50 crore
- Exemptions suggested for essential services and financial repayments
What happened
The National Payments Corporation of India (NPCI) introduced a framework to levy a Merchant Discount Rate (MDR) of 0.4% on person-to-merchant UPI payments exceeding Rs 2,000. This fee is capped at Rs 300 per transaction and is payable by merchants, with exemptions for individual payments and many everyday merchant transactions. Essential services and capital market payments have lower or fixed fees.
In response, IIT Bombay released a report titled 'UPI at a Crossroads: Reintroducing the MDR,' which examines the impact of this MDR proposal on the digital payments ecosystem. The report underscores the need to rationalize the MDR framework before implementation to preserve public trust and ensure that UPI remains an accessible and widely accepted platform.
Why it matters
UPI is a public digital infrastructure that has significantly boosted convenience for users and contributed positively to India's economy through productivity gains. The report points out that these long-term benefits outweigh the incremental income expected from merchant transaction fees under the new MDR model. However, if the MDR is not carefully calibrated, it risks generating negative sentiment, potentially reducing adoption and usage among merchants and consumers alike.
The report emphasizes that imposing MDR indiscriminately on all merchants could deter smaller vendors from adopting digital payments. It advocates for MDR to be limited to merchants with an annual turnover exceeding Rs 50 crore, covering about 90% of the proposed MDR revenue. Such a targeted approach would protect smaller merchants and encourage financial inclusion while allowing the ecosystem to generate necessary revenues for sustaining the platform.
What to watch next
The evolution of the MDR framework will be critical to UPI's future growth trajectory. Stakeholders should monitor responses from the NPCI, the Reserve Bank of India, and merchant associations regarding potential adjustments to the MDR policy, particularly the inclusion of exemptions for essential financial services like loan repayments and debt collection transactions.
Regulatory decisions under the Payment and Settlement Systems Act, 2007, will also play a decisive role in framing MDR rules that balance revenue generation with public interest. Keeping credit servicing transactions MDR-free will be an important element to support financial inclusion and minimize friction for borrowers. The policy outcome will shape the sustainability and user trust in India's leading digital payment platform.