India's UPI Payments Introduce Merchant Discount Rate, Raising Cost Questions

India's popular Unified Payments Interface (UPI) system is set to implement a Merchant Discount Rate (MDR) for person-to-merchant (P2M) transactions exceeding ₹2,000 from October 15. The new framework will charge 0.4% on such transactions, capped at ₹300 for payments of ₹75,000 and above, potentially altering the economics of digital payments for businesses.

The revised guidelines will affect a larger segment of small and mid-sized merchants. Previously, many small businesses, particularly those below a certain turnover threshold, were exempt. Now, only merchants receiving up to ₹1 Lakh per month via UPI QR codes will remain exempt. Exceeding this limit for three consecutive months will move a business into the standard MDR category.

Industry estimates suggest the new MDR structure could generate an annual revenue pool of approximately ₹22,000 crore by FY28. Banks are expected to capture the largest share, an estimated ₹14,000 crore, while third-party app providers like PhonePe, Google Pay, and Paytm could earn around ₹7,000 crore.

Retail associations have expressed concern, warning that the new charges could impact digital payment adoption, especially among smaller retailers operating on thin margins. Some businesses fear a return to cash transactions, particularly during peak seasons, and are assessing how to mitigate the added cost. The Retailers Association of India plans to engage with regulators to discuss potential adjustments to the MDR framework.