Three years after eliminating them, India’s government is considering reinstating merchant charges on UPI (Unified Payment Interface) and RuPay debit card transactions.
“A formal proposal to bring back MDR [merchant discount rate] on UPI payments for large merchants was sent to the Union government by the industry and now the concerned departments are considering it positively,” a senior banker told India’s Economic Times.
Currently, businesses in India do not incur any fees when customers use either type of payment. Before 2022, merchants were required to pay a MDR of less than 1% of the transaction amount to the processing bank.
A Bid to Boost Adoption
To encourage digital payments, the government removed these charges, which boosted UPI adoption, making it the most widely used payment method in the nation. However, this also eliminated a key revenue stream for banks and payment service providers.
The Indian government now plans to introduce a tiered pricing system, where larger businesses will pay higher charges than smaller ones. Large businesses already pay MDR for credit card payments. According to India Today, major retail merchants handle more than 50% of their transactions through such cards.
The Government’s Role in Payments
The fact that UPI has become the most popular retail payment method in India lends credence to the argument that the waiver should no longer apply. Payment companies further contend that compliance costs have increased, and many businesses rely on the UPI fee to remain profitable.
This contrasts with the situation in the U.S., where many local governments have made moves toward curtailing interchange fees. One difference in India is that the national government has played a key role in developing and promoting the payments network.
“Indian banks argue that since merchants already pay a fee to accept credit cards, a similar fee should be applied to debit cards to end the cost to taxpayers of operating the debit networks,” said Don Apgar, Director of the Merchant Payments Practice at Javelin Strategy & Research. “This is an interesting parallel for U.S. businesses, whose trade group the National Retail Federation has long argued that debit card payments should be free to merchants since banks are not extending credit when consumers spend their own funds.
“Of course, this argument ignores the costs of operating the network and related settlement infrastructure,” he said. “Debit networks cannot operate for free and would require taxpayer subsidies if fees to merchants were eliminated.”
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