The Indian government is preparing to amend the Payment and Settlement Systems Act to reintroduce the merchant discount rate (MDR) on Unified Payments Interface (UPI) transactions, reversing the zero-MDR regime initiated in 2019. This change would allow banks and payment apps to charge merchants for UPI transactions, with the MDR rate to be set by government notification, according to medianama.com.
The zero-MDR policy, which has been in place since January 2020 following a 2019 budget amendment, eliminated charges on UPI and RuPay debit card transactions for merchants. The proposed amendment would undo Section 10A of the Act, enabling the collection of MDR fees again. The move is expected to generate revenue primarily benefiting PhonePe, the largest UPI player by transaction volume and amount, holding 49% of the market share over the past three months, as per NPCI data cited by medianama.com.
Reinstating MDR on UPI transactions marks a significant policy shift in India's digital payments landscape. The MDR functions as a fee merchants pay to payment service providers, similar to credit card charges. PhonePe stands to gain the most from this change due to its market dominance. The MDR rates could range from 0.02% to 1.5%, impacting payments to merchants, which constitute about 29% of the total UPI transaction volume, according to calculations referenced by medianama.com.
The government’s amendment to Section 10A of the Payment and Settlement Systems Act is pending notification to determine the MDR rates. This legislative step will formally enable charging MDR on UPI transactions, ending the zero-fee period that has lasted since early 2020, as reported by medianama.com.