MDR on UPI

GS-III: Indian Economy

MDR Rates – Complex Structure

• UPI Payments of ₹2,000 or More: The new rates will solely apply to UPI payments of ₹2,000 or more at merchants.
• Capped Coverage: The charge stands at nearly only 2.5% of all UPI transactions.
• Different Gradations: There are different gradations within the rules.
• Small Merchant Exemption: UPI transactions at small merchants earning below ₹1 lakh/month will be exempted.
• Payment Solutions: There will be a flat MDR charge for certain merchant payments, while 0.4% will be applicable to other sectors.
• Capital Market Payments: All capital market payments of ₹2,000 and above will consequently carry a differential MDR.

Concerns among Merchants

• Political Backlash: Different rates and exemptions are clearly thought of keeping the political backlash in mind.
• SME Merchants and Adoption of UPI: They cast a shadow over SME merchants and hence may counter the momentum for UPI in India.
• Turnover Threshold: The rules are unclear on what happens to a small merchant that crosses the ₹1 lakh-a-month turnover limit.
• Income Monitoring: Who will monitor the income of these individuals?
• Compliance Burden: Either this will add to the compliance burden on small merchants, or it will convert into a new mechanism for real-time transaction-checking that banks would have to build.
• Short-Term Impact: In the short term, it will probably simply end up with small merchants saying they are not going to take UPI until there is more clarity about how much every transaction costs.

MDR and Customers

• No Passing to Customers: The government has asked banks to ensure that merchants do not pass on this charge to customers.
• Price Adjustment: The banking regulator has not made it clear how banks would verify if merchants amend prices to accommodate this extra cost.

Revenue for Payments Ecosystem

• ₹2,400 Crore: A ballpark estimate based on historical data indicates an upper limit of ₹2,400 crore monthly MDR revenue potential for the payment ecosystem.
• Lower Amount: Sectoral-level flat rates and reduced rates will result in a lower amount.

Beneficiaries and U.S. Pressure

• Government’s Position: The government, however, has denied any U.S. pressure to bring these rates more in line with those of American credit card companies.
• Beneficiaries: The data indicate that the gain will mainly go to private banks and U.S.-owned UPI apps.

RBI as an Alternative

• RBI Budget: An argument can still be made for the Reserve Bank of India to pick this tab from its surplus, which makes large profits each year.
• Payment Infrastructure: Keeping critical payment infrastructure operational is certainly a good use of these funds.

Need for Simplification

• Clarify the Structure: If the government is going to go ahead with this charge, it ought to absolutely make clear the structure.
• Time Before Rollout: There is time yet before it rolls out.
• GST Experience: The Goods and Services Tax experience indicates that small businesses suffer the most from rate complexity.

UPSC Mains Practice Question

Q. “The MDR levies announced for UPI transactions may slow down the adoption of this payment mode in our country.” Discuss the concerns regarding the new MDR structure.