Lower UPI subsidy an indication that MDR on UPI is around the corner, say bankers

MDR on UPI is around the corner

Even as the banks and payments industry is grappling with a paltry UPI subsidy for the current fiscal, it has rekindled the hope that the government is likely to let banks charge a fee for UPI payments in the next financial year, according to multiple bankers and payment industry executives.

“This year’s UPI subsidy is limited to transactions done at small merchants. This means that Merchant Discount Rate or MDR on UPI for large merchants is likely to be implemented within the next couple of months,” said a senior banker with a private sector bank.

On March 19, the central government announced Rs 1,500 crore as a subsidy for UPI transactions at merchants. Usually, the government disburses the subsidy every quarter, in the current financial year, it has done so at the fag end of the fiscal.

MDR is the fee that banks collect from merchants at the point of sale for facilitating digital payments. UPI MDR was 30 basis points before it was waived off by the government in 2020. One basis point is one-hundredth of a percentage point.

As per the government policy, it provides 15 basis points (bps) of subsidy for UPI transactions below Rs 2,000, the likely subsidy bill would have been around Rs 6,000 crore, indicating a shortfall of Rs 4,500 crore in the current financial year.

“Unlike in previous years, there is no mention of subsidies for Rupay debit card payments, which the government was providing earlier. This is a clear indication that the subsidies are going to stop, which might mean that the government will let the industry charge a small fee for UPI payments,” said a senior banker.

UPI or unified payments interface is the country’s most popular digital payments method, facilitating around 85 percent of all online transactions. The platform run by the National Payments Corporation of India (NPCI) sees over 17 billion transactions in a month worth over Rs 24 lakh crore.

In contrast with the government’s stance earlier that UPI is a digital public good and that it will support the growth of UPI, the finance ministry officials have been receptive to the industry proposal of charging 25bps fee for large merchants with an annual turnover of above Rs 40 lakh.

Last year, the payment industry recommended that large merchants like Amazon and Flipkart or other large retailers who are paying 2 percent MDR for accepting card payments should be able to pay 25bps for UPI transactions.

“Why should the government incentivise us with taxpayers’ money for processing transactions for large merchants? UPI dominates as India’s favourite payment option and every merchant will continue to offer UPI even by paying a mere 25 BPS as processing charges as they are anyways paying 2% for credit cards and other options,” said Vishwas Patel, joint managing director of Infibeam Avenues and chairman of Payments Council Of India.

According to a founder of a UPI app, the current move shows that the cutback has come on large merchants, which will likely be compensated with MDR to even off the overall incentive structure. “The government is clearly shifting the subsidy burden to large merchants,” the founder said.

However, any future MDR does not help the banks in recovering the current year’s loss.

“As the UPI transactions have been rising rapidly and the merchant transactions at an even higher pace, the increasing subsidy burden has come to stung the government. Also, there is a feeling that the product is so popular that the banks will become unpopular if they start charging customers,” said a second banker.