Major banks yet again push for MDR to large merchants on UPI, but Centre may not budge

Banks expect RBI to take up the UPI MDR issue with the government

Major banks are making a renewed push for merchant discount rate (MDR) on the popular Unified Payments Interface (UPI) platform for large and organised businesses, according to three digital and payment heads of banks Moneycontrol spoke with.

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

Banks have been taking this up with the National Payments Corporation of India (NPCI), which runs UPI, since late last year to recommend the Union government to take a relook at the MDR issue for large and organised merchants, who accept digital payments through cards which has MDR.

The NPCI and the RBI classify any merchant who recorded more than Rs 20 lakh annual turnover as a large merchant. These discussions are happening at the UPI Steering Committee meetings officially as well as unofficially. The minutes of the meetings available on the NPCI website make no mention of the MDR discussion.

“The NPCI does not take these large issues directly with the government but goes through the RBI. Both the regulators have been waiting for the general elections to get over. Now that it is, we hope they take this up as soon as they get an opportunity,” said a senior banker, who heads payments with one of the private sector banks.

A second banker who heads digital payments said that since these merchants already pay MDR for card payments, there should be no reason why they should not pay for UPI transactions above Rs 2,000.“Merchants like Amazon or Flipkart or large national physical retail chains have no reason to pay MDR. This has created an artificial preference for UPI among them, especially for transactions below Rs 2,000,” the digital banker said.

The UPI steering committee has 19 members with 16 of them are banks (including payments banks and small finance banks), apart from third-party apps, Google Pay, Cred and PhonePe.

No talks with the government yet

However, a source close to the regulator said that no discussions have taken place as of now adding that the RBI is not in a hurry since this is not a priority issue for the government.

The government had waived off the MDR on UPI for all transactions in early 2020 and the ensuing pandemic helped UPI to grow in leaps and bounds. 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.

“There were some unfounded concerns in some quarters after the government reduced the UPI subsidies in the Union Budget announced last week. The final payout is based on the number of transactions that happen in the financial year and has no correlation with budget allocation,” says a senior executive with a third-party app.

According to the executive, the government pays around 15 basis points or bps (100 basis points is equal to one percentage point) for transactions below Rs 2,000. It does not pay anything for transactions above Rs 2,000.

UPI is a political project

Some of the senior bankers who have held discussions with the RBI and the NPCI feel that the chances are slim as of now.

“For the government, UPI is a political project and not a payments platform. This has been the most important flagship programme of the government since Aadhaar that has been highly successful and has unequivocal support from customers to merchants,” said a banker who has worked closely with the RBI.

Another banker said that the success of UPI as a Digital Public Infrastructure (DPI) showpiece on an international stage. “UPI has long ceased to be a payment platform. For the government, this is a political project and a flagship digital payments project to showcase the success of DPI at scale in international platforms,” said the banker.

In fact, the government has been working with several emerging economies to create UPI-like domestic payments DPI in those countries. The government also has ambitions to internationalise UPI payments. It is also looking at UPI linkages with similar real-time payments systems of other countries to facilitate international remittances.

“Given the larger ambitions of the government with UPI, it is unlikely to tinker with a successful model. But we have to keep the pot boiling as our UPI bill keeps on increasing at an alarming level,” said the payments head quoted earlier.