Indian Government to Allow Merchant Fees on UPI Transactions
India's government is preparing to reintroduce merchant fees (MDR) for UPI transactions, reversing the 2019 decision that had eliminated these charges for payment service providers.
The Indian government is moving to amend the Payment and Settlement Systems Act to re-establish fees for UPI transactions, effectively allowing banks and payment apps to charge merchants again. This move reverses a 2019 policy that had set the Merchant Discount Rate (MDR) to zero for UPI and RuPay debit card transactions.
The proposed amendment will empower the government to notify MDR charges, which merchants will have to pay to payment service providers for facilitating transactions. Previously, this charge was levied on credit cards and had existed for UPI before being removed in January 2020.
Industry analysis suggests that the primary beneficiaries of reintroducing MDR will be banks, particularly those handling significant merchant transaction volumes like HDFC, SBI, and ICICI. Payment apps such as PhonePe and Google Pay will also receive a share of these fees, which could significantly impact their financial standing, especially as they consider future public offerings.
While the reintroduction of MDR is expected to boost revenue for financial institutions and payment platforms, it will increase the cost for merchants accepting digital payments. The government's shift indicates a potential strategy to ensure the financial sustainability and growth of India's rapidly expanding digital payments ecosystem.