Why In News?
The National Payments Corporation of India (NPCI) has formally defined small merchants under its new Unified Payments Interface (UPI) Merchant Discount Rate (MDR) framework.
What is Merchant Discount Rate (MDR)?
It is the commercial fee charged to merchants for accepting digital payments.
Governed under the Payment and Settlement Systems Act, 2007.
MDR compensates the payment ecosystem for hosting infrastructure, real-time clearing, and transaction security.
Who Pays MDR?
MDR is paid exclusively by the merchant to its acquiring bank or payment service provider.
Merchants are strictly prohibited from passing MDR charges on to consumers, ensuring buyers pay only the exact listed shelf price.
Role of Banks and Payment Service Providers
The collected MDR revenue is distributed across key participants in the UPI network:
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Acquiring Banks: Fund merchant onboarding, terminal deployment, and point-of-sale maintenance.
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Issuing Banks: Support account-to-account clearing systems and customer-side authentication engines.
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Payment Aggregators (PAs) and Application Providers: Maintain user-facing UPI apps, server bandwidth, and technical integration.
MDR in Digital Payments
UPI MDR is structured to be significantly lower than traditional card payment rails:
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Credit Cards: Headline MDR ranges between 1.5% and 2.5% per transaction.
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Debit Cards: Maximum MDR caps set by the Reserve Bank of India (RBI) reach up to 0.9% for large merchants on physical point-of-sale (PoS) channels.
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UPI Payments: Fixed at 0.4% with an absolute ceiling of ₹300, making high-value digital processing substantially cheaper than cards.
What are the Key Features of the New UPI MDR Framework?
0.4% MDR on Eligible Transactions: Standard P2M account-to-merchant payments exceeding the basic monetary threshold attract a 0.4% MDR.
₹2,000 Transaction Threshold: All P2M transactions up to ₹2,000 carry 0% MDR, ensuring that over 95% to 96% of routine daily merchant transactions remain completely free.
₹300 Maximum MDR Cap: High-value transactions carry a fixed fee ceiling of ₹300, preventing fee escalation on large payments.
₹75,000 Transaction Threshold for Cap: The ₹300 cap activates once a transaction reaches ₹75,000, ensuring a payment of ₹1,00,000 incurs only ₹300 rather than ₹400.
Exemption for Small Merchants: Micro-vendors categorized under the Person-to-Person-Merchant (P2PM) classification pay 0% MDR even on individual transactions exceeding ₹2,000.
₹1 Lakh Monthly UPI Collection Limit: P2PM zero-MDR eligibility applies to small vendors receiving up to ₹1 lakh per month through UPI QR codes without requiring GST registration.
Exemption for Person-to-Person Transactions: All Person-to-Person (P2P) transfers remain 100% free for both senders and recipients, with zero platform fees or transaction quotas.
Exemption for Small-value P2M Transactions: Payments up to ₹2,000 incur zero commercial processing costs across all merchant tiers.
Special Sector-specific Charges:
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Essential & Public Utilities: A flat ₹5 fee applies to transactions above ₹2,000 across railways, telecommunications, insurance, fuel, public utilities, and agricultural inputs.
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Capital Markets: A concessional rate of 0.02%, capped at ₹300, applies to transfers for mutual funds, securities, stockbrokers, and dealers.