M. Nagaraju, former secretary of the Department of Financial Services (DFS), stated that the zero-Merchant Discount Rate (MDR) policy provided no financial return to banks for the costs incurred in onboarding merchants on the Unified Payments Interface (UPI). He highlighted that banks bore expenses related to merchant verification, QR code deployment, and ongoing support without compensation, despite the rapid growth in UPI transaction volumes, according to livemint.com.
Nagaraju explained that the reassessment of the zero-MDR model was prompted by the widening gap between the operational costs borne by banks and the government's support for the UPI ecosystem. The zero-MDR policy, which eliminated charges on merchants for UPI transactions, led to banks absorbing onboarding and maintenance costs without direct revenue. This situation raised concerns about the sustainability of the model as transaction volumes surged, per livemint.com.
The zero-MDR policy was initially introduced to encourage digital payments adoption by removing merchant fees. However, as UPI transactions expanded rapidly, the financial burden on banks increased significantly. Nagaraju's comments underscore the challenges faced by banks in balancing ecosystem growth with cost recovery. The issue has sparked discussions on revising the MDR framework to ensure banks can cover expenses while maintaining the momentum of digital payments, according to livemint.com.
The Department of Financial Services and other stakeholders are evaluating potential changes to the MDR policy to address these concerns. The next policy review session is scheduled for later this year, where decisions on MDR adjustments and support mechanisms for banks are expected to be discussed, as reported by livemint.com.