Bringing back MDR will increase UPI penetration, make fintechs viable: Industry

Financial Crunch

Bengaluru: With rising operation costs involved in Unified Payments Interface (UPI) transactions, as well as the exponential penetration that this payment method has seen across India in the past decade, fintech companies are steadfast on their demand of reinstating a merchant discount rate (MDR).

An MDR is a fee charged to merchants by payment processing companies for their services which allow the merchant to accept payments via methods such as debit card or UPI. Starting January 2020, the government set the MDR for UPI and transactions by RuPay debit cards at zero, in order to promote digital payments.

This has been a long-standing pressure point for payment firms. Late in March, industry body Payments Council of India (PCI), submitted a letter to Prime Minister Narendra Modi asking him to urgently reconsider the policy. The letter proposed introducing an MDR for RuPay debit cards for all merchants, and an MDR of 0.3% for UPI only for large merchants (with a turnover of more than Rs 40 lakh).

Without MDR, the majority of fintech companies - that are already loss-making - are faced with a critical question of sustainability,  industry executives told DH.

“There is an entire ecosystem working on digital payments, with so many entities right from the RBI to the last mile, like technology partners, acquirers, innovators. All of them need some source of revenue to sustain,” said Deepak Chand Thakur, co-founder and CEO, NPST.

“There is a cost to every transaction. The only revenue that merchant acquirers get is through the MDR, there is nothing else. So, the costs are there, but you have revenues that have been dramatically reduced. That leads to a situation where you can’t invest further as it is a loss making enterprise,” pointed out Sunil Rongala, Senior VP, Strategy, Innovation and Analytics - India, Worldline.

While the question of alternative revenue models has arisen, this wouldn’t address the issue of sustainability. Ultimately, for companies working on UPI, it is that very platform which has to give them a revenue source, according to executives.

“Some payment players try alternative models - like monetising add-on services, charging for data insights, or relying on interchange from other instruments. But these are band-aid solutions. They don’t scale, especially for smaller players or for use cases like P2M (person-to-merchant). At some point, the economics just stop working,” explained Rohit Taneja, CEO, Decentro.

The government has implemented an incentive scheme for supporting low-value BHIM-UPI transactions (P2M) at an estimated outlay of 1,500 crore for the financial year 2024-25 (or till March 31, 2025). However, industry players found this to be far from adequate. As per a statement by PCI, this allocation pales in comparison when compared to Rs 246.82 lakh crore worth of transactions processed in 2024.

The support provided by incentives is limited to the beneficiary bank. The Budget allocated has to be distributed across the ecosystem, pointed out industry players.

Another issue is that without some MDR, the risk is higher: players will either exit the market or cut corners, and that affects consumer experience in the long run, added Taneja.

The industry is clear on its demand for the fee to be imposed only on large merchants. With the majority of transactions being of low amounts, the mass will not be affected, especially when larger stores are already paying MDR on credit and debit card transactions.

“There should be a clear demarcation of where the affordability exists and where it does not. This is not for MDR on small businesses that do not have GST and cannot pay income tax. If there are proper online transactions happening on organisations like Flipkart, Amazon or Starbucks, then MDR should definitely be there,” explained Thakur.

Going forward, executives are sure that the volume of transactions will increase, and with that, technology, optimisation, innovations, compliance costs will also scale. All of these will demand higher investments, so costs will only go up.

As costs rise, the current model becomes even more tenable. Smaller players will find it hard to survive, innovation will slow, and service levels may drop, cautioned Taneja.