MDR On UPI Is Here, But Who Foots The Bill?

India's popular digital payment system, UPI, is set to implement a new merchant discount rate (MDR) on October 15. This change, which will affect how banks and payment providers charge merchants for processing UPI person-to-merchant (P2M) transactions, will result in a 0.4% MDR on transactions above ₹2,000, capped at ₹300 for payments of ₹75,000 and above.

Merchants with monthly UPI QR code transactions up to ₹1 lakh are currently exempt from this new regime. Experts estimate that the new MDR could generate an annual revenue of about ₹22,000 crore for banks and third-party app providers, with banks capturing the majority of the revenue. However, small and mid-sized sellers are concerned that the new MDR could increase their costs, particularly given the high volume of transactions above ₹2,000 during the festive season.

Retailers' association warns that the new MDR could discourage digital payment adoption among smaller retailers, potentially pushing them back towards cash payments. Merchants estimate the impact on their margins to be significant, especially for businesses with average transaction sizes near the ₹2,000 threshold. While some businesses believe they can mitigate the additional cost from the MDR, others remain cautious about the potential consequences for their operations.