A small merchant discount rate (MDR) on select Unified Payments Interface (UPI) transactions is unlikely to have a major impact on transaction volumes, Reserve Bank of India (RBI) Governor Sanjay Malhotra said on Wednesday after the October monetary policy review.
Asked whether the introduction of MDR from 15 October could lead to a fall in UPI volumes and whether the RBI could consider bearing the cost for the larger good, Malhotra said a decision on MDR had already been taken.
“As of now, we do not see any drop in volumes, and I don’t personally think that a small fee will have a major impact on the volumes,” he said at the post-policy press conference.
The comments come as is set to move away from its long-standing zero-MDR structure for a limited set of higher-value merchant transactions. The government has said the change is aimed at supporting the long-term sustainability of the digital payments ecosystem without imposing charges on consumers.
What changes for UPI transactions from 15 October
Under the new framework, a 0.4% MDR will apply to specified person-to-merchant (P2M) UPI transactions above ₹2,000. For transactions of ₹75,000 and above, the MDR will be capped at ₹300 per transaction.
Person-to-person (P2P) UPI transactions will continue to remain free, irrespective of the amount transferred.
The government has also said that payments to merchants up to ₹2,000, along with transactions covered under the zero-MDR framework for small merchants, will remain free. As a result, around 96% of P2M UPI transactions are expected to remain unaffected by the new framework.
Importantly, MDR is not a charge that consumers will have to pay when they make a UPI payment. It is a fee within the merchant payments ecosystem and is distributed among participating banks, service providers and UPI application providers.
Certain essential and thin-margin sectors, including railways, telecommunications, insurance and fuel, will have a flat ₹5 MDR for transactions above ₹2,000. Payments relating to mutual funds, securities, stockbrokers and dealers will attract a lower 0.02% MDR, capped at ₹300.
Why RBI expects the small fee to have limited impact
Malhotra’s comments indicate that the RBI does not expect the introduction of MDR, by itself, to materially change how consumers and merchants use UPI.
The new fee applies only to specified merchant transactions, while person-to-person payments will continue to remain free. The impact will therefore be concentrated among merchants processing higher-value UPI payments.
For consumers, there is no direct charge for making a UPI payment under the new framework. The government has also said that merchants should not pass the MDR on to customers as a separate fee.