UPI payment transactions will undergo a significant change starting October 15, with the introduction of a Merchant Discount Rate (MDR) on payments exceeding Rs 2,000 made to merchants. The new charges were announced by the government on September 15, citing a need to cover operational costs for the UPI system.

Under the new structure, merchants will incur an MDR of 0.4 per cent on eligible UPI payments above the Rs 2,000 threshold. However, for transactions of Rs 75,000 or more, this fee will be capped at Rs 300. Notably, customers will not be charged this fee directly; instead, it will be absorbed by merchants.

For instance, if a customer pays Rs 3,000, the MDR would amount to Rs 12. In the case of a Rs 50,000 payment, the MDR would be Rs 200. In contrast, a transaction of Rs 1 lakh would yield an MDR of Rs 400, but merchants would only pay Rs 300 due to the cap.

Implications for Different Payment Types

The new MDR primarily impacts payments made to merchants, specifically those exceeding Rs 2,000. Certain sectors, however, will experience different rates; payments for railways, telecom, insurance, fuel, and agricultural inputs will incur a flat MDR of Rs 5 for amounts above Rs 2,000.

For financial transactions involving mutual funds and securities, there will be a MDR of 0.02 per cent, also capped at Rs 300. Recurring payments such as utility bills, OTT subscriptions, and monthly investments will not attract the MDR. Additionally, small merchants earning up to Rs 1 lakh a month through UPI QR payments will continue to benefit from zero MDR.

The government has advised banks to ensure that these charges are not passed on to consumers. Payments between individuals, including those of Rs 2,000 or less, will remain free from the new MDR.

Rationale Behind the Introduction of MDR

The UPI system has operated without a Merchant Discount Rate for almost six years, making this a notable change. The government cites increasing operational costs associated with maintaining the payment infrastructure, including technology expenditure, cybersecurity, and fraud prevention measures.

The new charge has raised concerns among retailers, particularly small businesses which operate on limited margins. The Retailers Association of India has expressed apprehension that increased costs could compel merchants to prefer cash transactions over digital payments, impacting the overall payment landscape.

Despite these concerns, the main takeaway for customers is that the new MDR will not function as a direct fee for UPI transactions. As of October 15, eligible payments exceeding Rs 2,000 will include charges at the merchant level only, while both person-to-person transactions and payments of Rs 2,000 or less will maintain their fee-free status.

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