Merchants face 0.4% fee on UPI payment above ₹2,000

Why in news?

The National Pay-ments Corporation of India has introduced a charge of 0.4% that most merchants will have to pay banks and payment processors on UPI payments they receive in excess of ₹2,000 per transaction.

UPSC Relevance

Prelims

GS3, Indian Economy

What is the Merchant Discount Rate ?

Merchant Discount Rate (MDR) is the fee charged to merchants by acquiring banks and payment aggregators to cover the operational, network, and processing costs of accepting digital payments (such as credit/debit cards or UPI). It is usually calculated as a percentage of the total transaction value.

Merchant Acquiring Bank : A merchant acquiring bank (or acquirer) is a financial institution that lets a business accept credit and debit card payments. 

• It acts as a middleman between the business (merchant), the card networks (like Visa or Mastercard), and the customer’s bank (the issuer). 

Government Policy Trajectory in India for MDR:

2020: In January 2020, the government introduced a Zero-MDR policy on UPI and RuPay debit card transactions to accelerate mass digital payment adoption.

2026: To address payment infrastructure maintenance costs for banks and fintechs, the government introduced a targeted 0.4% MDR (capped at ₹300) only for P2M transactions exceeding ₹2,000. 

Recent changes :-

• National Payments Corporation of India (NPCI) introduced a 0.4% MDR on Person-to-Merchant (P2M) transactions above ₹2,000, 
• It will be effective from October 15.
• For transactions of ₹75,000 and above, the MDR charge is capped at ₹300 per transaction.
• Exemptions:
  • All Person-to-Person (P2P) transactions (accounting for 37% of volume and 70% of value of present UPI transactions) remain completely free.
  • P2M transactions up to ₹2,000 are exempted
  • Transactions done via RuPay debit cards carry zero MDR.
  • Small merchants (receiving up to ₹1 lakh per month via P2PM QR codes) are fully exempt.
• Concessional / Flat Rates:
  • Flat ₹5 MDR: Applies to transactions above ₹2,000 in essential/thin-margin sectors like Railways, telecom, insurance, fuel, and agricultural inputs.
  • 0.02% MDR (Capped at ₹300): Applies to capital market transactions (mutual funds, securities, stockbrokers) to encourage retail participation.
• Distribution & Dedicated Fund:
  • The 0.4% charge will be shared among ecosystem partners (acquiring banks, app providers, etc.).
  • 5% of total MDR collections will build a dedicated fund to promote UPI adoption among small and unorganized street vendors.

Associated Concerns 

• Merchant Pushback & Price Bumping: Risk of merchants attempting to pass the fee onto consumers informally or inflating retail shelf prices despite prohibitions.
• Informal Cash Reversion: Merchants might encourage customers to pay cash for purchases above ₹2,000 to avoid incurring the 0.4% fee.
• Implementation & Monitoring Burden: Ensuring acquiring banks strictly prevent merchants from adding surcharges requires strong regulatory enforcement.
• Concerns raised regarding the friction or burden it creates within the digital payments ecosystem.

Government’s Stand

• Self-Sustainability & Infrastructure Investment: Funds generated will support the expansion, security, and maintenance of server bandwidth for the massive UPI infrastructure.
• Financial Inclusion & Digital Public Infrastructure (DPI): UPI forms a core pillar of India’s DPI (“India Stack”). The 5% allocation for small-merchant onboarding directly strengthens formalization of the informal sector.
• Negligible Impact on Small Vendors: Data shows only 4% of total merchant transactions exceed ₹2,000 or fall outside the zero-MDR P2PM threshold, leaving 96% of everyday small payments completely unaffected.
• Consumer Protection: Strict advice issued to banks and app providers prohibiting platform fees, hidden charges, or passing the cost to buyers.
• Financial Sector Stabilization: Flat/reduced rates prevent cost escalation in essential public services and encourage retail investment in formal financial markets.
• Comparison with Card Networks: The 0.4% rate is significantly lower than traditional credit card MDRs (typically 1.5%–2.5%) and debit card MDRs (up to 0.9%), preserving UPI’s competitive edge.

NPCI (National Payments Corporation of India)

• An umbrella organization for operating retail payments and settlement systems in India. 
• Non-profit organization under Section 8 of the Companies Act.
• Established as an initiative of the Reserve Bank of India (RBI) and Indian Banks’ Association (IBA) under the Payment and Settlement Systems Act, 2007.
• Built transformative systems including UPI, RuPay, IMPS, AePS, NETC FASTag, and NACH.
• Drives nearly half of the world’s real-time payment volumes through UPI, expanding globally via its international arm, NIPL(NPCI International Payments Limited).

Practice MCQ  

Consider the following statements regarding the National Payments Corporation of India (NPCI) and the Merchant Discount Rate (MDR) regulations for UPI:

1. ​NPCI is a subsidiary company created by the Reserve Bank of India (RBI). 
2. ​All Person-to-Person (P2P) UPI transactions are not subject to a standard 0.4% MDR charge.
3. Merchant Discount Rate (MDR) is the fee charged to customers by acquiring banks and payment aggregators on UPI transactions. 

​Which of the statements given above are correct?

​(a) 1 only

(b) 2 only

(c) 1 and 3 only

(d) 1, 2 and 3

​Answer: (b) 2 only