Despite UPI being “fantastic at many levels […] it is an incredibly painful experience for ecosystem participants who all end up losing money as part of that proposition,” Mastercard’s CFO Sachin Mehra said at a recent conference, raising concerns about the commercial sustainability of the hugely popular payment method, TechCrunch reported on October 11.
Mehra is likely referring to the zero MDR model of the UPI.
What is MDR? For each transaction involving digital payments such as credit or debit cards, the merchant usually pays a certain percentage of the transaction amount, known as Merchant Discount Rate (MDR), to banks and payment service providers for their services. Credit cards, for example, attract around 2 percent MDR, meaning for every Rs. 1,000 that a merchant gets paid, Rs. 20 will go as fees to those who make the payment possible. But UPI attracts zero MDR because the government notified regulations to this effect in January 2020 to promote digital payments in the country. This essentially means zero fees are paid by merchants to those who facilitate UPI payments such as payment companies.
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UPI ecosystem participants are supported by government incentives: The government has, however, launched various financial incentive schemes in the last few years to compensate UPI apps, banks, and payment providers, who spend significant amounts in promoting UPI, maintaining the infrastructure, and facilitating payments. For example, in January this year, the government approved a ₹2600 crore incentive scheme. But the looming question is whether the government can forever support UPI with such incentives.
Not the first time concerns around zero MDR have been raised: Ever since the zero MDR model was first proposed, the payments industry has, expectedly, objected to it. Back then, the Payments Council of India (PCI) had said that the move would eventually lead to the collapse of the payments industry because, without any income from digital transactions for banks, incentives for banks to roll out digital payments infrastructure were reduced. MediaNama in 2022 also wrote about Why Zero MDR Is A Dangerous Play With Incentives, And Will Hurt Financial Inclusion And Businesses.
Multiple proposals to revisit the zero MDR policy: The Reserve Bank of India as well as the Parliamentary Standing Committee on Commerce have both published reports asking the government to relook into the MDR policy for UPI transactions.
