UPI, recognized as one of the largest real-time payment systems globally, handled 23.6 billion transactions valued at 29.9 trillion rupees ($313.5 billion) in July, according to government statistics. Walmart’s PhonePe and Alphabet’s Google Pay lead the UPI payment sector.
Industry leaders have frequently pointed out that sustaining growth in digital payments has become challenging, as payment providers do not earn fees on UPI transactions, limiting investment opportunities within the ecosystem.
An amendment to India’s Payment and Settlement Systems Act, introduced in parliament by Finance Minister Nirmala Sitharaman, would permit the implementation of a merchant discount rate (MDR) on digital payments, as per industry and regulatory insiders.
The insiders indicated that this modification establishes a legal framework for imposing an MDR, although no decisions have been made regarding the fee levels or their applicability.
The insiders preferred to remain anonymous as they were not authorized to communicate with the media. The finance ministry, central bank, and national payments authority of India did not immediately provide comments.
An MDR represents a fee that merchants pay to banks and payment service providers for facilitating digital transactions. In India, credit cards typically incur an MDR of approximately 1.5%, while debit cards can reach up to 0.9%, but UPI transactions are currently exempt from merchant fees.
TWO APPROACHES BEING CONSIDEREDPolicymakers are evaluating two main options, according to two sources familiar with the situation: imposing an MDR on transactions exceeding a certain threshold or establishing fees linked to a merchant’s annual revenue.
One suggestion is to target charges exclusively at larger merchants while maintaining UPI payments free for consumers and smaller businesses, the sources noted.
The government is contemplating the introduction of an MDR of 0.3% to 0.5% on transactions surpassing 2,000 rupees ($20.97) for merchants with an annual revenue exceeding 15 million rupees, as reported by a government source.
A report by Jefferies on Tuesday indicated that transactions above 2,000 rupees constitute only 4% of merchant payment volumes but represent approximately 67% of the transaction value.
The brokerage predicted that this initiative could generate a revenue stream of 50 billion to 100 billion rupees for the payments sector, benefiting companies like Paytm and Pine Labs.
