Fintechs explore charging merchants for UPI in talks with RBI

Merchant payments constitute around 62 percent of the overall UPI payments and have been growing rapidly

Fintech firms in a meeting with Reserve Bank of India (RBI) governor and other officials have discussed the possibility of charging merchants for Unified Payments Interface (UPI) transactions, some of people who were part of the last week’s discussion have told Moneycontrol.

This is the first time that fintechs raised the issue of a merchant discount rate (MDR) for merchants with the regulator directly, as the segment sees rapid growth.

In the March 5 meeting, RBI governor Sanjay Malhotra discussed the payments ecosystem with non-bank Payment System Operators and fintechs and also their expectations from the central bank.

“Given that the absence of MDR charges on UPI impacts small and big merchants differently, the regulator and the government will take a look at this issue, especially if the lack of such charges are leading to other obstacles,” one of the participants told Moneycontrol on condition of anonymity. “There is a case for MDR on UPI, we have to see how can we have a pricing mechanism (for small and large merchants).”

MDR is the commission that merchants pay to banks and other payment companies for facilitating a transaction. There is no MDR on UPI payments, while debit cards have an average of 0.75 percent and credit cards around 1.75 percent per transaction.

Malhotra underscored the need for responsible innovation and ensuring compliance by the entities who are new to regulatory space, the RBI said in a statement released last week.

According to one of the participants, the regulator acknowledged that the zero MDR charges on UPI has paid off, given the exponential growth of the platform.

The rise and rise of merchant payments

Merchant payments have grown rapidly and now account for around 62 percent of all UPI transactions. They were only 40 percent in January 2022, pointing to a shift in UPI use from person-to-person to merchants.

Major banks have been making a case for UPI for large and organised businesses, Moneycontrol wrote last year. The view  did not find favours with the government because of the elections.

The NPCI, which operates UPI, and the RBI classify any merchant who records more than Rs 20 lakh annual turnover as a large merchant.

Merchant payments are over thrice those of credit card spending in the country every month. The average ticket size though is much smaller, creating stress in the banking system that has to process around 17 billion transactions in a month. Hence, everyone in the ecosystem is looking for ways to monetise the payments system enough to cover the cost.

For instance, 86 percent of the merchant payments were below Rs 500 this January. Another 10 percent of these transactions were between Rs 500 and Rs 2,000. Only 59 percent of the merchant transactions were below Rs 500 in January 2022. The skew towards micropayments is only increasing.

This is largely because a large number of small merchants, roadside hawkers and other service providers started adopting UPI payments across the country, including in smaller towns and rural areas.

The government waived off the MDR on UPI for all transactions in early 2020 amid the covid pandemic when the use of instant payments system zoomed.

The government pays annual subsidies to banks and payment companies like third-party UPI apps.

MDR pays for the cost the payment companies incur on technology, people, infrastructure and the data centre cost for facilitating billions of transactions every month through the platform.