The era of free UPI payments will end in India on Oct. 15, when a 0.40% merchant discount rate (MDR) will take effect on digital transactions of Rs 2,000 and above received by a merchant. Payments of Rs 75,000 and above will attract a flat charge of Rs 300. The charge will be docked to the merchant, not to the buyer, and the proceeds will be shared by the facilitating bank and payments interface.
By this move, India is voluntarily relinquishing its status as the only major economy in the world to operate a zero-charge digital payments system. The party lasted six years, since transactions were made free in January 2020 to promote cashless payments. Effectively, India now returns to a regime that existed prior to that, when person-to-merchant (P2M) transactions attracted an MDR of 0.30% with a cap of Rs 100 per transaction. Then, as now, the fee was charged to merchants, not consumers.
As with any impost, this move is hugely unpopular, with traders and consumers alike protesting the need for a new levy at a time of high fuel and commodity prices. To muffle the blow, the government has added provisos to spare some sections. Person-to-person (P2P) transactions will continue to be free irrespective of value. Similarly, small vendors don’t have to pay an MDR if they receive no more than a total of Rs 1 lakh per month by way of UPI. Some mass-transaction merchant categories such as railways, telecom services, insurance and fuel stations are required to pay only a flat Rs 5 per transaction above Rs 2,000.
But it’s in the very nature of governments to be economical with the truth on taxes. The Finance Ministry says the 0.4% MDR will apply only to about 4% of all P2M transactions. Indeed, 96% of UPI transactions are for small purchases of less than Rs 2,000. However, it’s when you consider the value of transactions, not the number, that the real picture becomes clear. As per National Payments Corporation of India data, transactions above Rs 2,000 account for a whopping 67% of the value of all payments. An MDR of 0.40% on just those high-value transactions will accrue revenues of Rs 25,000 crore annually, or Rs 64 crore daily, to banks, payment gateways, and UPI apps. Further, the present 0.4% MDR charge on merchants is just the beginning. It can be expanded to P2P transactions whenever the government chooses to in the foreseeable future. The potential revenue that this can unlock for payments aggregators is awesome.
The biggest beneficiaries of this move will be foreign players Phone Pe and Google Pay, which together have about 78% of the market share of UPI payments. The Opposition believes that the BJP-led Union government, under pressure from US President Donald Trump, is bringing about a charge on UPI transactions entirely to benefit these American-owned companies. The government has thus far not convincingly addressed this criticism, as also allegations that its ethanol blending programme and energy purchases as well are to appease the American President.
The government has been similarly unconvincing in addressing concerns that the MDR costs will ultimately be passed on to consumers. Most small businesses operate on tight margins and will inevitably add the 0.4% impost to the bill they present to their customers. The government’s bland assurances that this will not happen are just not convincing, just like all its other protestations.