India Eyes UPI Merchant Charges: RBI to Set Fees

The Indian government has initiated parliamentary amendments to the Payment and Settlement Systems Act. This legislative move signals a potential reinstatement of Merchant Discount Rates (MDR) on Unified Payments Interface (UPI) transactions.

This policy shift would once again allow banks and payment service providers to levy charges on specific electronic payment methods. These fees were previously discontinued in January 2020 with the aim of promoting broader digital payment adoption across the country.

Understanding the Proposed MDR Framework

Under the proposed amendments, the Reserve Bank of India (RBI) would gain the authority to determine these Merchant Discount Rates. This regulatory power would specifically apply to person-to-merchant (P2M) transactions exceeding a certain threshold.

• MDR applicable for P2M transactions over ₹2,000.

Revenue Generation and Stakeholder Distribution

The reintroduction of MDR is anticipated to significantly boost revenue streams for major payment platforms operating in India. Companies such as Paytm and Pine Labs stand to benefit from these new charges.

• Projected revenue pool for payment ecosystem by FY28: ₹5,000-10,000 crore (Jefferies).
• Payment platforms’ potential retention: 5-10 basis points.

The MDR collected would not be exclusive to a single entity but would be shared across the payment ecosystem. This distribution mechanism involves several key participants in each transaction.

• Issuing banks
• Merchant acquirers
• UPI handle providers
• Payer banks

Addressing Profitability Challenges

This governmental initiative emerges amidst ongoing struggles faced by UPI companies to establish sustainable business models. Despite the rapid and widespread growth of the UPI platform, profitability has remained a significant challenge for these entities.