MDR a small fee, will not have major impact on UPI volumes: RBI Guv Malhotra

What is the merchant discount rate (MDR), and who is charged it in a digital payment?

Merchant discount rate, or MDR, is the fee linked to accepting a digital payment. It is generally charged to the merchant, not directly to the customer. The fee is deducted from the payment received or settled separately. MDR matters because digital payments require infrastructure, fraud controls, settlement systems, and customer support.

For example, if a customer pays a shop ₹5,000 and the MDR is 0.4%, the fee is ₹20. The merchant may receive ₹4,980 before any other applicable adjustments. That amount can be shared among the merchant’s bank, the customer’s bank, payment app, and payment network. The exact division depends on the payment arrangement and applicable rules.

The article says the government allowed a 0.4% MDR for transactions above ₹2,000. RBI Governor Sanjay Malhotra called it a small fee and said it should not significantly reduce UPI volumes. The article does not specify who ultimately bears each portion of the fee.

What new MDR rule did the government allow, and which UPI transactions does it cover?

The new rule permits charging a merchant discount rate on certain UPI payments. According to the article, transactions above ₹2,000 can attract an MDR of 0.4%. MDR is normally connected with accepting the payment, so it primarily affects the merchant’s settlement rather than automatically adding a customer-facing charge.

For instance, a UPI payment of ₹5,000 would attract a permitted fee of ₹20 at the stated rate. A payment of ₹2,000 itself is included here only as a calculation example; the article specifically says transactions above ₹2,000. The exact collection process and any detailed exemptions are not described in the article.

The change matters because UPI had become widely used without a visible transaction fee for many users and merchants. RBI Governor Sanjay Malhotra said the small fee would not have a major effect on volumes. He also said the RBI had not seen a fall in UPI volumes at that time.

How large is the permitted fee—what would a 0.4% MDR amount to on a transaction of Rs 2,000, Rs 5,000, or Rs 10,000?

A 0.4% MDR means multiplying the transaction value by 0.004. The fee rises with the payment amount. This calculation shows the rupee impact clearly, which helps explain why the RBI governor viewed the charge as relatively small compared with the convenience of UPI.

On ₹2,000, 0.4% equals ₹8. On ₹5,000, it equals ₹20. On ₹10,000, it equals ₹40. The article says the permitted fee applies to transactions above ₹2,000, so ₹2,000 is included here because the question requests that illustration. Whether the merchant or another participant absorbs the amount depends on the arrangement.

The article reports that RBI Governor Sanjay Malhotra did not expect a major impact on UPI volumes. He said there had been no drop in volumes as of his comments. The broader implication is that a modest processing cost may be tolerated if UPI remains convenient and widely accepted.

Why does the RBI governor believe this small fee will not cause a major fall in UPI transaction volumes?

The RBI governor’s view is that a small fee will not outweigh UPI’s usefulness. People and businesses often value fast payments, broad acceptance, and simple mobile transactions. If those benefits remain much larger than the added cost, payment activity can continue at high levels. The article does not provide survey data or a measured price-response estimate.

The permitted rate is 0.4% for transactions above ₹2,000. That would be ₹20 on a ₹5,000 payment. The charge may reduce the merchant’s net receipt or be handled through the payment arrangement. Its direct effect on a transaction depends on who bears the fee and whether merchants change prices or payment preferences.

Malhotra said, “As of now,” the RBI did not see a drop in UPI volumes. He therefore did not expect a major decline from the small fee. Future effects could depend on the final rules, merchant behaviour, and whether customers experience any visible surcharge. Those details are not supplied in the article.

How might the MDR be divided among merchants, banks, payment apps, and the payment network?

MDR is usually an ecosystem fee, not money kept entirely by one participant. A digital payment involves the merchant’s bank, the customer’s bank, the payment app or provider, and the payment network. The fee helps compensate them for routing payments, maintaining systems, settling funds, and managing security. The article does not state the approved allocation.

For a ₹5,000 payment at 0.4%, the total permitted MDR would be ₹20. A contract or regulatory framework could divide that ₹20 among participating institutions. The merchant’s bank may handle acceptance and settlement. The customer’s bank may support the payer’s account. The app may provide the interface, while the network routes and authenticates the transaction. Exact shares vary by arrangement.

The article only says the government allowed the MDR and that transactions above ₹2,000 can attract it. Therefore, any precise split would require additional rules or industry disclosures. The practical outcome for merchants depends on the final allocation, settlement method, and whether costs are passed through in prices.

Why has UPI traditionally been inexpensive or free for many users and merchants, and who has helped support its operating costs?

UPI became inexpensive for many users and merchants because transaction charges were often waived or kept invisible at the point of payment. That encouraged rapid adoption and supported India’s shift toward digital payments. Keeping prices low also helped small merchants accept UPI without buying expensive equipment or handling cash. These broader cost and adoption benefits mattered more than collecting a fee on every payment.

The operating system still has costs. Banks and payment providers maintain accounts, apps, servers, security controls, customer support, and settlement links. In India, government incentives and support programmes have helped offset some costs for eligible low-value digital payments, while participating financial institutions have also supported the infrastructure. The article itself does not explain this historical funding arrangement.

The new permitted MDR changes the pricing framework for transactions above ₹2,000. Malhotra said the small fee should not materially reduce volumes. Its longer-term effect will depend on whether the fee makes acceptance more sustainable without discouraging merchants or customers from choosing UPI.

What makes people continue using a payment method when its price rises slightly, and how do convenience, acceptance, and network effects affect payment volumes?

A small price increase does not automatically reduce usage. People compare the fee with the method’s benefits, including speed, ease, reliability, and access to many merchants. Businesses also value quick settlement and less cash handling. If switching to another method is harder or less widely accepted, users may continue paying digitally despite a modest charge.

Network effects reinforce this behaviour. More customers encourage more merchants to accept UPI. More accepting merchants make UPI more valuable to customers. This creates a feedback loop that can support high volumes. For example, a ₹20 MDR on a ₹5,000 payment may be tolerated if UPI is faster and more convenient than cash or another payment option. The exact response will vary by merchant and transaction.

Malhotra said the RBI had seen no fall in UPI volumes and did not expect a major impact from the small fee. Still, future volumes could depend on pricing, merchant margins, reliability, and the final operating rules. The article does not quantify these effects.

Key Facts:

📌 MDR is generally paid by the merchant accepting a digital payment.

📌 The fee supports payment processing and related digital infrastructure.

📌 The article cites a permitted MDR of 0.4% above ₹2,000.

📌 The government allowed MDR charging for eligible UPI payments.

📌 The stated MDR rate is 0.4%.

📌 The article says transactions above ₹2,000 can attract the fee.

📌 0.4% of ₹2,000 is ₹8.