UPI and additional charge

The Centre's clarification that transactions between individuals and most merchant payments through UPI will continue to be made without any charge has removed a major concern surrounding the issue. At the same time, the Finance Ministry has indicated that, as part of ensuring the long-term sustainability of UPI, a nominal merchant discount rate (MDR) may be introduced in future for selected merchant transactions above a certain limit. The government's official clarification came after the Lok Sabha passed a Bill amending the Payment and Settlement Systems Act, 2007. The amendment passed by the Lok Sabha allows banks and other service providers to levy fees on transactions made through UPI and other notified digital payment methods.

UPI transactions have seen a huge increase across India. The sharp rise came after the Covid period. It has become a new habit across society. Against this backdrop, there had been apprehension surrounding the new Bill that banks might have to be paid a charge for such transactions. The Finance Ministry's clarification that UPI transactions between individuals will remain completely free has, at least for now, dispelled that fear. The Finance Ministry has said that the MDR for high-value merchant transactions will be lower than the rates charged on credit and debit cards. The rate will be fixed by the UPI and Services Steering Committee under the leadership of the National Payments Corporation of India. Credit cards currently attract an MDR of one to three per cent of the transaction value, while the rate for debit cards ranges from 0.3 to 0.9 per cent.

Opposition parties and others had alleged that the government was moving to introduce MDR on UPI transactions under pressure from the United States. The Finance Ministry, however, has said that the decision was not taken under pressure from anyone, but because the cost of providing cybersecurity and infrastructure has increased with the rise in UPI transactions. The government says that relying solely on subsidies is not suitable for the next phase of UPI's growth and that a balanced system is needed to make the economy stronger.

Although the specific amount of MDR to be charged has not been stated, the Finance Ministry has said that transactions above Rs 2,000 account for around four per cent of total UPI transactions. Based on this, the understanding has spread that MDR will apply to transactions of Rs 2,000 and above. The Prime Minister himself has repeatedly said that digital transactions should be encouraged. Digital transactions are also what the new generation relies on the most. In this situation, imposing MDR on small transactions between individuals and others would have led to widespread protest and a setback. UPI was introduced in 2016, while MDR on BHIM-UPI transactions was made zero from January 2020. It is this that is now set to change, albeit nominally.