The new framework will come into effect from October 15. While customers will continue to use UPI without a transaction charge, eligible merchants will have to bear the MDR on qualifying transactions.
What changes for merchants?
Under the new framework, eligible UPI P2M transactions above ₹2,000 will attract an MDR of up to 0.4%. For example, on a ₹3,000 eligible merchant payment, a 0.4% MDR would amount to ₹12.
The charge is to be borne by the merchant and cannot be passed on to the customer.
However, the impact will vary depending on the merchant and the nature of the transaction. Small merchants receiving up to ₹1 lakh a month will have mandatory zero MDR, according to the framework. Certain sectors will also have concessional rates instead of the standard 0.4%.
Telecom, insurance and fuel transactions above ₹2,000 will attract a flat ₹5 MDR, while payments towards mutual funds and stock brokers will attract an MDR of 0.02%, subject to a ₹300 cap.
Will all UPI transactions become chargeable?
No. The MDR framework does not apply to all UPI transactions.
Person-to-person (P2P) payments will continue to remain free, irrespective of the transaction value. P2M transactions of up to ₹2,000 will also have zero MDR under the standard framework.
The government has said only a small proportion of merchant transactions will be impacted by the introduction of MDR.
This means the new charge is targeted at a specific segment of UPI merchant payments rather than being a fee on UPI as a whole.
What does it mean for fintechs and payment companies?
The introduction of MDR creates a new revenue pool for participants in the UPI ecosystem.
For payment companies, this is significant because merchant payments have historically operated without a conventional MDR on UPI. The new framework allows eligible transactions to generate revenue that can be shared among the participating banks and payment service providers.
Paytm, in a stock-exchange filing on September 15, said the new framework would generate additional revenue from the merchant business for many payment transactions that were previously free. The company added that it would make further disclosures, if required, once the framework becomes effective and its impact can be ascertained.
Why does revenue sharing matter?
The MDR collected from eligible transactions will not accrue to a single participant. It will be distributed across the payment ecosystem, including banks and other participants involved in processing the transaction.
Kunal Jhunjhunwala, Founder, Airpay, an integrated, omnichannel financial services platform and payment gateway, said the revenue-sharing structure would be important because fintechs have invested in technology and infrastructure and have helped expand digital payments among merchants.
He said the focus would now be on whether the revenue generated through MDR is distributed in a way that supports the different participants involved in the UPI ecosystem.
What does it mean for merchants with thin margins?
The financial impact will depend on the merchant’s transaction value, margins and proportion of payments that fall within the MDR framework.
For a business processing a large number of eligible transactions, even a small percentage-based charge can add to payment acceptance costs. At the same time, small merchants covered by the ₹1 lakh monthly threshold will remain protected from MDR.
Jhunjhunwala also pointed to the transition challenge for merchants and fintechs, with the new framework scheduled to take effect on October 15. Payment companies will have to communicate the changes to merchants and make the necessary technology and backend adjustments before implementation.
What does it mean for consumers?
For consumers, UPI payments will continue to be free.
The MDR is a merchant-side charge, and banks have been advised to ensure that merchants do not pass the charge on to customers.
So, if a consumer makes an eligible ₹3,000 UPI payment, the consumer continues to pay ₹3,000. The applicable MDR is settled on the merchant side.
Why is MDR being introduced now?
The introduction of MDR is also linked to the need for sustainable investment in the digital payments infrastructure as UPI continues to scale.
Rohit Mahajan, Founder & CEO, Plutos ONE, an Indian fintech and payment infrastructure company, said the next phase of digital payments would require investment in payment infrastructure that is more resilient, scalable and secure.
He said fintechs and other ecosystem participants need sustainable business models to recover infrastructure costs and continue investing in technology and innovation.
What happens to UPI’s low-value payments?
The framework continues to protect low-value merchant payments by keeping transactions up to ₹2,000 outside the standard MDR structure.
According to Mahajan, around 95% of P2M transactions are below ₹2,000. P2P transactions will also remain outside the MDR framework.
This means the introduction of MDR does not change the basic economics of everyday low-value UPI payments for consumers.
What to watch after October 15
The actual impact of the new framework will become clearer once MDR collections begin and payment companies report how the additional revenue affects their businesses.
Key areas to watch include merchant adoption, the response of businesses operating on thin margins, the distribution of MDR revenue among ecosystem participants and whether the new revenue stream translates into greater investment in payment infrastructure.
