Who has to pay the Merchant Discount Rate on UPI? 

Why in News?

A revised Merchant Discount Rate (MDR) framework is scheduled to apply to selected UPI merchant payments from 15 October 2026. The framework seeks to finance the payment ecosystem while retaining free transactions for individuals and protecting small merchants. 

What is Merchant Discount Rate?

• MDR is the fee (service charge) a merchant pays for accepting a digital payment. It compensates participants providing payment processing, banking and related services.
• For example, on an eligible ₹10,000 purchase, a 0.4% MDR equals ₹40, excluding any applicable tax. The customer pays the purchase price; the merchant bears the processing fee. 

Key features of the reported MDR framework:

• Person-to-Person (P2P) transactions will remain free of charge, regardless of the amount being transferred. 
• Small-value merchant payments: Payments up to and including ₹2,000 remain MDR-free.
• Small merchants, including street vendors receiving up to ₹1 lakh per month through UPI QR codes under the Person-to-Person-Merchant (P2PM) category, will also be exempt from MDR. 
• General merchant payments: Eligible person-to-merchant (P2M) transactions above ₹2,000 attract 0.4% MDR. For transactions of ₹75,000 and above, the MDR will be capped at ₹300 per transaction. 
• Essential sectors: Transactions of ₹2,000 or more in essential and thin-margin sectors, such as railways, telecommunications, insurance, fuel, and agricultural inputs, will attract a flat MDR of ₹5 per transaction. This flat charge is intended to provide cost certainty for critical public services and businesses operating on narrow margins.
• Capital market transactions such as payments to mutual funds, stockbrokers, dealers, and for equities will attract an MDR of 0.02%, capped at ₹300 per transaction. This rate is aimed at supporting retail participation in formal financial markets.
• Consumer protection: Merchants are not supposed to pass MDR directly to customers; UPI apps cannot impose hidden user charges. 

A dedicated fund will be established to promote UPI adoption among small merchants, with an amount equivalent to 5% of total MDR collections contributed to this fund. 

How widespread is the impact?

According to an analysis:

• 37% of transactions by volume are P2P transfers & 60.5% are P2M payments up to ₹2,000. Thus, 97.5% remain outside MDR on these criteria alone.
• P2M transactions above ₹2,000 make up just 2.5% of all UPI transactions by volume. However, it represents around 20% of total transaction value. 

The MDR will be shared among payment ecosystem participants, including banks, payment service providers, and UPI application providers.

Why introduce MDR?

• Finance operational costs: Free customer transactions still require expenditure on servers, settlement, dispute resolution and customer support.
• Improve security and reliability: Predictable revenue can support fraud detection, cybersecurity and infrastructure upgrades.
• Sustain merchant services: Revenue can fund onboarding, reconciliation tools and assistance beyond merely issuing a QR code.
• Reduce dependence on subsidies: A commercial revenue stream can complement public support for socially valuable payment services.

Associated Concerns:

• Indirect consumer burden: Prohibiting a separate UPI surcharge does not eliminate possible recovery through higher general prices. Legal liability and ultimate economic burden can differ.
• Pressure on thin margins: Illustratively, a 0.4% charge consumes 20% of a 2% margin on the affected sale, before considering savings from reduced cash handling.
• Return to cash or avoidance: Merchants may discourage UPI, split payments or route business receipts through personal accounts.
• Market concentration: Revenue may disproportionately accrue to established apps and banks; transparent pricing and interoperability remain important.
• Unclear redistribution: The article reports a small-merchant adoption fund equivalent to 5% of MDR collections. Its funding source, governance and utilisation require clarification.

UPSC PYQ 2018:

Q. Which one of the following best describes the term “Merchant Discount Rate” sometimes seen in the news?

(a) The incentive is given by a bank to a merchant for accepting payments through debit cards pertaining to that bank.

(b) The amount paid back by banks to their customers when they use debit cards for financial transactions for purchasing goods or services.

(c) The charge to a merchant by a bank for accepting payments from its customers through the bank’s debit cards.

(d) The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Sale PoS machines and debit cards.

Answer: (c) A charge paid by a merchant to a bank for accepting customers’ debit-card payments.