Source: The Hindu

Why in News?

• The National Payments Corporation of India (NPCI) has introduced a Merchant Discount Rate (MDR) on certain UPI merchant transactions, effective from 15 October 2026.
• A uniform MDR of 0.4% applies to Person-to-Merchant (P2M) UPI transactions above ₹2,000.
• The charge is borne by the merchant and not the consumer.
• The move seeks to address the financial sustainability of UPI infrastructure, including maintenance, cybersecurity and technological upgrades.

What is MDR?

• Merchant Discount Rate is a fee deducted from the merchant’s transaction value for processing a digital payment.
• It is generally distributed among entities involved in the payment ecosystem, such as:
• Issuing/payment bank.
• Acquiring bank.
• Payment network such as NPCI.
• Under the new UPI framework, MDR does not apply to Person-to-Person (P2P) transactions.

New UPI MDR Framework

• Merchants with UPI QR inflows exceeding ₹1 lakh per month for three consecutive months can be shifted to the regular merchant category.
• Banks have been advised to ensure that merchants do not directly pass the MDR burden to consumers.

Why Has MDR Been Reintroduced?

• UPI has operated under a zero-MDR framework for small merchant transactions, while the cost of maintaining the digital payments ecosystem has continued to rise.
• The annual cost of operating and maintaining UPI infrastructure is estimated at around ₹20,000 crore.
• The new MDR is intended to create a revenue stream for sustaining:
• Payment infrastructure.
• Cybersecurity.
• Server and network capacity.
• Technological innovation.
• Exempting P2P and small-value transactions seeks to protect digital inclusion and prevent additional costs for small merchants and ordinary users.

Significance for Digital Payments

• The framework represents a shift from prioritising rapid UPI adoption towards ensuring the long-term financial sustainability of India’s Digital Public Infrastructure (DPI).
• Protecting small-value transactions can preserve UPI’s role in everyday retail payments while monetising higher-value merchant transactions.
• A sustainable payment ecosystem requires balancing three objectives: affordability zfor users, viability for banks and fintechs, and continued investment in secure and resilient digital infrastructure.
• The effectiveness of the framework will depend on transparent implementation, prevention of consumer cost pass-through and ensuring that MDR does not discourage smaller businesses from adopting digital payments