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Consumer Staples
In a significant move aimed at ensuring the financial sustainability of India's burgeoning digital payments ecosystem, the Payments Council of India (PCI) has written to the Prime Minister's Office (PMO) seeking the reinstatement of the Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions for large merchants and RuPay debit cards. This initiative comes in the wake of the government's decision to drastically reduce subsidies for digital payments, leaving a substantial funding gap for the industry.
What is MDR?
MDR is a fee charged by banks to merchants for providing digital payment services, including transactions made through UPI and RuPay debit cards. Historically, these fees have been a crucial revenue stream for payment service providers, enabling them to invest in infrastructure, cybersecurity, and innovation. However, in a bid to promote digital inclusivity, the Indian government has exempted UPI and RuPay transactions from MDR since January 2020.
The recent cut in government subsidies has put the digital payments industry under significant financial strain. For the current fiscal year, the subsidy has been reduced to ₹1,500 crore, down from ₹3,681 crore in the previous year, and is limited to small merchants and low-value UPI transactions[1][3]. This reduction leaves large merchants without subsidy support, impacting the industry's ability to cover operational costs.
The PCI has proposed introducing a nominal MDR on RuPay debit cards for all merchants and a 0.3% MDR specifically for UPI transactions involving large merchants. This approach aligns with existing MDR structures for other digital payment instruments, such as credit cards (approximately 2%) and non-RuPay debit cards (around 0.9%)[4][5]. The council emphasizes that this will enable sustainable monetization without disrupting digital payment adoption at the grassroots level since large merchants are already accustomed to MDR for other payment modes[3][4].
PCI's proposal ensures that small merchants, who make up about 90% of digital payment acceptors and are crucial to digital inclusion, continue to benefit from zero MDR, thus preserving their accessibility to digital payments[1][3]. This approach strikes a balance between promoting digital payments among smaller businesses and ensuring the financial viability of the entire ecosystem.
The absence of MDR has resulted in a significant financial strain on payment service providers. The industry faces potential losses without a fair pricing mechanism, impacting its ability to innovate and expand the digital payment network[3][5]. By reintroducing MDR for large merchants, the PCI aims to stabilize the financial foundation of the sector, ensuring continued investments in digital infrastructure and cybersecurity.
UPI has become a cornerstone of India's digital payments landscape, dominating over 80% of transactions. However, the zero MDR regime has limited the financial incentives for service providers to expand UPI’s reach deeper into rural areas or invest heavily in innovation and security[5]. PCI emphasizes that with a sustainable MDR framework, India can maintain its global leadership in digital payments while integrating more citizens into the formal financial system.
The Payments Council of India's call for reinstating MDR on UPI and RuPay transactions for large merchants represents a critical step towards securing the long-term sustainability of India's digital payments ecosystem. As the government reviews this proposal, the focus will remain on striking a balance between fostering digital inclusivity and ensuring the financial health of the industry. This move, if approved, would not only address the operational costs faced by payment service providers but also pave the way for further innovation and expansion in the digital payments space.
