UPI MDR move will support digital payment infrastructure, says Mohandas Pai
The central government's recent decision regarding Merchant Discount Rate (MDR) and Unified Payments Interface (UPI) is a positive step for the digital economy. According to Mohandas Pai, former Chief Financial Officer and Board Member of Infosys, this move will help provide the necessary funding for the infrastructure required to support rapidly increasing digital payment volumes.
Pai emphasized that the impact on the average user will be minimal, noting that nearly 96 per cent of UPI transactions will remain completely unaffected by these changes. Speaking on the sidelines of the International Tax Conference in Bengaluru, the veteran professional highlighted how the new framework is designed to sustain the ecosystem.
Minimal Impact on Individual Users
One of the most significant aspects of this decision is that it preserves the free nature of most transactions. Pai explained that roughly 70 per cent of all UPI payments are Person-to-Person (P2P) transactions, which will continue to carry no charges whatsoever.
In addition to the P2P exemptions, transactions below the Rs 2,000 threshold are also exempt from MDR. Only transactions exceeding Rs 2,000 will be subject to a nominal MDR, ensuring that small-value daily transactions remain free for the public.
To illustrate how users might navigate the new rules, Pai suggested that if someone needs to make a payment of Rs 2,500, they could simply split it into two smaller payments. By making one payment of Rs 1,500 and another of Rs 1,000, they can easily stay below the Rs 2,000 threshold to avoid the fee.
Infrastructure Upgrades and Rising Volumes
The necessity for this shift stems from the massive growth in transaction numbers across the country. Current projections suggest that transaction volumes are expected to climb from 24 billion to 50 billion within just two years.
Because of this surge, the entire IT infrastructure must be upgraded to support real-time processing. Pai noted that in the past, UPI experienced transaction failure rates as high as 15% to 30% due to sudden surges in volume, necessitating a more robust technical foundation.
Previously, the system operated under a completely free regime for a long time. This placed a heavy financial burden on banks, fintech startups, and digital payment companies, who had to cover all the investment and maintenance costs.
Funding the Digital Ecosystem
The financial losses and capital investments required to maintain this massive infrastructure have been significant. Pai argued that if banks are forced to bear the entire cost of these upgrades, it will ultimately impact depositors.
Under the new framework, the cost will be shared by merchants who directly benefit from the ability to offer online payments. It is important to clarify that MDR is not a tax, but a payment made to banks and payment providers, similar to the way credit card processing works.
When a consumer uses a credit card, merchants pay a processing fee to the bank and the credit card company. The government has clarified that the MDR is distributed among payment ecosystem participants to support the continued expansion of the UPI network.
Key details regarding the new UPI framework include:
UPI remains completely free for all person-to-person transactions, regardless of the amount.
Approximately 96% of all Person-to-Merchant (P2M) transactions will remain unaffected.
MDR applies only to specific merchant transactions that are above Rs 2,000.
Funds are used to support the operation and expansion of the UPI ecosystem.