UPI's free lunch is over: Why the 0.4% MDR charge is fair, needed and overdue

For a population that is increasingly pampered with freebies - from TV sets to laptops in poll-bound states - a sudden demand to pay for digital transactions, however meagre, is seen as sacrilege. But history shows that mixing economic activity and charity does not end up well.

Outrage over the 0.4% merchant discount rate (MDR) on UPI transactions is misplaced. No service can be efficient and reach a wider audience without users paying for it. These charges align with other markets, such as Brazil and China.

Also read: UPI MDR from October 15: Govt plans daily monitoring to stop merchants passing 0.4% fee to customers


Arguments against it are that the poor are being burdened with another tax and that small merchants will be squeezed. A thorough reading of the proposal will prove these arguments wrong. On the contrary, the charges have been well-crafted so that the interests of the less privileged are taken care of.

National Payments Corporation of India (NPCI) has said person-to-person payments will remain free, and all transactions up to ₹2,000 are exempt from MDR charges. Small merchants, with up to ₹1 lakh transactions a month, are not in the fee net either. UPI payments have become so ubiquitous in urban India that many walk out of their homes even without a wallet, something unthinkable a few years ago.

And that's because of the massive infrastructure built by NPCI. Banks and fintech companies have connected merchants with the banking and payments system. This requires hundreds of servers, thousands of employees, ensuring cybersecurity, and the management of potential liabilities, which need thousands of crores of rupees in investments. How can a service that requires at least ₹15,000-20,000 cr of investments a year be run for free?

Look no further than state transport corporations and electricity boards. Anyone with a choice will give a miss to government-run buses, and even small households are willing to pay for power if only they get it 24 hrs a day. It was during Covid that these services became free. But it can't continue for eternity. The digital payments ecosystem growth is tapering, and the absence of charges is benefiting giant corporations such as Google, Amazon and Flipkart. Lack of incentives shut new competition out.

While scrapping of charges 6 yrs ago led to wide acceptability in urban centres, it held back growth in rural India. Digital payments penetration in Brazil and China has surged past 80% of the population. In India, however, it's just half that. Absence of fees has created a lopsided market, with a few like Google and PhonePe dominating the scene. Introduction of MDR charges opens avenues for enterprising ones to challenge this dominance. NPCI has been working to limit the market share of individual companies to reduce systemic risk, but this was not possible due to a lack of fresh competition, as Indian digital payments were more run as a charity.

Yet, another contention against MDR charges is that merchants will pass it on to customers and move away from digital payments. Both are flawed arguments. NPCI has mandated acquiring banks to ensure that the fees are not passed on. This also levels the playing field between MNCs such as Visa and Mastercard on one side, and the likes of RuPay on the other, which banks were reluctant to issue as it provided no income.

Also read: Explainer -- India's UPI MDR shake-up: What changes and why it matters

Furthermore, there's little incentive for merchants used to digital payments to move back to cash. Will a merchant selling a watch or a phone for ₹10,000 not pay ₹40 charge and, instead, collect cash, preserve it and then pay his supplier?

Take the use of credit and debit cards. Despite charges of 1.5-2%, usage has only been going up, reflecting a choice of convenience over fees burden. eCommerce firms like Amazon and Flipkart have benefited the most from digital payments. Given their deep pockets and gains, they better pay for the benefits.

There was no better time than now to begin charging for the most convenient service. Failing which our payments system in a few years would have resembled the rickety state transport buses.

(govardhana.rangan@timesofindia.com)