MDR on UPI Transactions Can Help Sustain Digital Payments Infrastructure

The proposed Merchant Discount Rate (MDR) on certain UPI transactions is not a tax and could help support investments in digital payment infrastructure, TV Mohandas Pai, Chairman of Aarin Capital and former CFO and board member of Infosys, said on Wednesday.

Speaking to reporters in Bengaluru, Pai said around 96 per cent of UPI transactions would remain outside the scope of the charges. He said person-to-person (P2P) transactions, which account for about 70 per cent of all payments, would not carry charges, while merchant transactions below Rs 2,000 would also remain exempt.

Pai explains which UPI transactions could attract MDR

According to Pai, only merchant transactions above Rs 2,000 would be subject to the proposed nominal MDR.

He said MDR should not be viewed as a tax because the payment is made to banks and payment service providers for processing transactions, similar to the charges associated with credit card payments.

Pai also said consumers could split larger payments into smaller transactions to remain below the Rs 2,000 threshold. For instance, a Rs 2,500 payment could be divided into payments of Rs 1,500 and Rs 1,000, he explained.

He argued that maintaining UPI infrastructure requires substantial investment, particularly as transaction volumes continue to rise.

Rising UPI volumes raise infrastructure funding questions

Pai said UPI had previously experienced transaction failure rates of between 15 per cent and 30 per cent during sudden increases in transaction volumes. With UPI transactions expected to rise from 24 billion to 50 billion over the next two years, he said banks and payment infrastructure providers would need to upgrade their systems to handle real-time processing at a larger scale.

According to Pai, sharing some of the infrastructure cost with merchants that benefit from digital payments could reduce the financial burden on banks.

Rajasthan Finance Commission Chairman Arun Chaturvedi also commented on the proposed 0.4 per cent UPI charge on merchant transactions above Rs 2,000. He said India's large-scale use of UPI has helped establish the country as a major player in digital payments globally.

The proposed MDR has therefore brought attention to both the cost of maintaining India's growing digital payment infrastructure and the potential impact of charges on merchants.