The New UPI Rules: Who Really Pays the Fee?

Every time there is a new development concerning UPI, there seems to be a flurry of confusion and anxiety. The latest drama is all about the new Merchant Discount Rate (MDR) charges on UPI transactions that will kick in on October 15. Before you start panicking about additional costs while shopping or think about carrying a wallet with you, relax. The situation is actually quite simple and for the average consumer, it will not change a thing.

The government and National Payments Corporation of India (NPCI) have carefully drafted these regulations to fund the extensive digital infrastructure that safeguards UPI without burdening the common man. Here is what you need to know about the new UPI charges, who will bear them, and how they compare to other modes of payment.

What Exactly is the New UPI Charge?

According to the latest notification, a Merchant Discount Rate (MDR) will be levied on UPI payments made to merchants if the value of the transaction exceeds Rs 2,000. To put it simply, MDR is a charge that the business has to pay its bank for processing a digital payment just like how it has to pay rent for leasing a shop front or electricity bill for keeping the neon lights on.

The MDR on UPI is exceptionally low at 0.3% and is also capped i.e. there is a maximum limit beyond which the bank cannot charge the merchant. This provision will help keep costs in check especially for large-value transactions.

The ₹1 Lakh Reality Check

The image makes it absolutely clear why most merchants are unfazed by the proposed MDR. It compares the MDR for different payment methods on a hypothetical ₹1 Lakh transaction-

• UPI- With the MDR capped at 0.3%, this is the cheapest mode of digital payment. The most a merchant will have to pay on a ₹1 Lakh transaction through UPI is ₹300.
• Debit Cards- MDR for debit cards is up to 0.9%, which means the cost for merchants on a ₹1 Lakh transaction will be ₹900.
• Credit Cards- These are significantly more expensive for merchants as they have to bear MDR between 1.5%-2.5%. This implies that the ₹1 Lakh transaction through a credit card could potentially cost the merchant anywhere between ₹1,500 and ₹2,500.

It should be obvious from the numbers that UPI is by far the most compelling digital payment method for businesses in India.

Will You Have to Pay Extra at the Counter?

The short answer is No. These charges will remain confined within the domain of banks and businesses. The government has explicitly prohibited UPI apps from levying any kind of platform fee or checkout charges on the consumer for MDR. The Finance Ministry has asked banks to make sure that they recover the MDR charges from businesses and not make the consumers pay for it.

There is a very likely possibility that businesses will try to offset the MDR cost by raising the final price that the customer pays. However, according to market principles, that would be counterproductive since digital payments attract more customers and lead to higher footfall and sales.

There is no reason for a shopkeeper to increase his prices since on an already low margin of 0.3%, he will not make any significant profits by hiking the bill by 0.3%. You will continue to pay the same price for your groceries. The same logic applies to any digital transaction that you make.

Are Small Shops and Friends Affected?

As far as the new framework is concerned, there are two major categories of people who will not be charged any MDR-

•  Person to Person (P2P) transactions- Any digital money transfer between individuals will continue to be free. If you decide to go Dutch on a restaurant bill or pay a friend back for a loan, there will be no MDR charged.
•  Small-Time Vendors- If a street food seller collects up to ₹1 Lakh in a month through their UPI QR code, they will not be liable to pay any MDR. The banks will take care of this by keeping a watch on such accounts and only levy MDR if they cross the ₹1 Lakh threshold for three consecutive months. This essentially means that small-time businesses and even home businesses will not be charged any MDR.

Since nearly 96% of merchant transactions will fall under these two categories, they will not be affected by the new MDR framework.

Special Rules for Essentials

As far as the NPCI is concerned, it would be unfair to levy a percentage-based charge on essential services such as railways, telecom, insurance, fuel, education, and agriculture. It has therefore decided that any payment made towards such services and utilities (water, electricity) will attract a minimal MDR of ₹5 instead of a percentage-based MDR. AutoPay transactions such as recurring payments for your OTT subscriptions, credit card payments, or Sip mutual funds will not attract any MDR.

Why Introduce This Fee?

UPI processes billions of rupees every month. That is a lot of money and it requires a sophisticated digital infrastructure to keep the system safe and functional. The UPI app that you use to scan QR codes and send money to your friends is not free to operate. It requires extensive backend maintenance, cybersecurity systems, and software updates to keep running smoothly without ever crashing or compromising the security of users’ money. The UPI system is so large in scope that any cybersecurity breach or digital attack can damage the lives of millions of Indians. The new MDR will ensure that there is enough money to keep UPI safe and free for everyone.

In summation, the new MDR framework will have limited impact on the common consumer while helping UPI maintain its status as the fastest digital payment system in the world. The UPI framework and app are incredibly sophisticated and it requires serious funds to maintain its security and seamless experience. The new MDR will provide the needed revenue to support this. As a consumer, you are free to continue using UPI the way you always have been.