Traders challenge UPI merchant fee ahead of rollout

A member of the National Traders’ Welfare Board has called on the government to abandon plans to introduce a 0.4% merchant discount rate (MDR) on higher-value UPI transactions, arguing it could stifle business growth and add costs for consumers. The levy is set to commence on October 15, but Ramesh Khandelwal, representing Madhya Pradesh on the government-appointed board, intends to raise the issue at the upcoming board meeting and requests the immediate withdrawal of the charge.

Khandelwal contends that small businesses operating with slim margins may struggle to absorb the added transaction expense, which could potentially be passed on to customers in the form of higher retail prices. The National Payments Corporation of India (NPCI) states that the revised framework will apply to specified person-to-merchant UPI payments exceeding Rs 2,000, with merchants absorbing the fee rather than consumers.

The charge will be capped at Rs 300 for transactions of Rs 75,000 or more. Smaller transactions, person-to-person transfers, and some specified categories will remain free of MDR. Khandelwal's opposition underscores growing apprehension among traders regarding the reintroduction of merchant fees on UPI after six years of a zero-MDR policy.

A nationwide survey of over 32,000 merchants and businesses revealed that only 17% were comfortable paying the 0.4% MDR on transactions above Rs 2,000, while 41% were unwilling to pay any fee. The policy change represents a significant shift in the economics of the UPI ecosystem, as banks, payment applications, and payment aggregators argue that the surge in transaction volumes necessitates increased investment in infrastructure, fraud prevention, cybersecurity, and system capacity.

The new MDR aims to generate revenue to cover these expenses while keeping small-value and personal transfers outside the charging framework. UPI has emerged as the leading retail digital payment system, processing billions of transactions monthly, which has heightened the operational costs of maintaining the network despite users' accustomed practice of feeless payments.

Khandelwal's intervention highlights the critical question of whether merchants will accept these costs or seek alternative payment methods, such as cash, bank transfers, or other digital channels. The dispute is expected to revolve around merchant margins, enforcement mechanisms, and the feasibility of absorbing the levy without raising prices or altering payment preferences.