UPI Transactions May Soon Be Charged: What It Means for Users and Merchants

India’s digital payment landscape, led by the Unified Payments Interface (UPI), has been a game-changer, offering seamless, instant transactions. However, recent discussions indicate that Merchant Discount Rate (MDR) charges might be reintroduced, which could mean an end to free UPI transactions.

Why Were UPI Transactions Free?

The Indian government eliminated MDR charges on UPI and RuPay debit card transactions in 2020 to promote digital payments. Previously, businesses had to pay a small percentage of each transaction to banks and payment service providers. To offset the loss of MDR, the government introduced incentive schemes to compensate payment providers.

Why Is MDR Making a Comeback?

The Payments Council of India (PCI) has proposed bringing back MDR charges, citing financial sustainability concerns. Maintaining UPI infrastructure requires significant investment, but government incentives have been reducing each year.

For instance, in FY24, the government provided over ₹3,000 crore in incentives. However, for the current financial year, only ₹1,500 crore has been approved. Industry experts argue that at least ₹10,000 crore is required annually to sustain the system.

Impact on Businesses and Consumers

If MDR charges are reinstated, businesses might have to bear additional costs or pass them on to customers. This could discourage small merchants from accepting digital payments and affect consumers who have enjoyed zero-fee transactions so far.

Industry’s Appeal to the Government

To ensure a sustainable revenue model, the PCI has formally requested the government to impose an MDR of 0.3% on large UPI transactions and introduce a nominal charge on RuPay debit card transactions. This step aims to keep digital payment services viable without burdening small businesses and consumers.

Conclusion

Reintroducing MDR charges on UPI is a significant decision that could impact India’s digital payment adoption. While it could help sustain payment providers, it also risks slowing down the rapid shift towards cashless transactions. A balanced approach, ensuring both sustainability and affordability, will be essential for the continued success of UPI in India.