No charges for consumers on UPI; new MDR framework via PSS Act amendment
The Government of India has clarified that no charges will be levied on UPI users, particularly for P2P transactions, and that the MDR on UPI is currently zero. The Payment and Settlement Systems Act, 2007, serves as the primary legal framework for India's payment and settlement systems, encompassing provisions related to digital payments. If MDR is implemented in the future, it could be restricted to select merchant transactions and those exceeding a specified threshold. The objective behind discussions on MDR is not to make UPI expensive, but to develop a sustainable revenue model for cybersecurity, technical infrastructure, and the digital payment system.
The Government of India has clarified that transaction charges will not be levied on UPI users. Specifically, Person-to-Person (P2P) transactions will remain free of charge. Consequently, ordinary citizens can continue to transfer funds and make payments via UPI without incurring any separate transaction fees. The government has previously clarified that no MDR is currently being charged on UPI.
PSS Act and Proposed Changes
The Payment and Settlement Systems Act, 2007 (PSS Act) is the primary legal framework regulating payment and settlement systems in India. Within this Act, Section 10A is particularly significant for digital payments. Since January 2020, the MDR on RuPay debit card and BHIM-UPI transactions has been set to zero to promote digital payments.
What is MDR and its relation to UPI?
The Merchant Discount Rate (MDR) is a fee levied within the payment mechanism that processes a merchant's payment transactions. It is typically received by the financial institutions or payment systems associated with the merchant. It is important to note that MDR and the UPI charges levied on consumers are not the same thing. Under the current system, the MDR on UPI is zero, and the government also provides financial support to incentivize the digital payment ecosystem.
Scenario regarding the future implementation of MDR
The proposed arrangement should not be interpreted as an immediate decision to levy charges on UPI transactions. According to the government's clarification, if an MDR (Merchant Discount Rate) system is introduced in the future, it may be limited to specific merchant transactions and applicable only to those exceeding a certain threshold. The objective is not to make UPI expensive but to develop a sustainable revenue model for the payment ecosystem.
Need for a sustainable revenue model for UPI
The massive expansion of UPI necessitates continuous investment in areas such as cybersecurity, fraud prevention, technical infrastructure, real-time payments, and grievance redressal. Currently, the government provides incentives to participants in the UPI ecosystem. Therefore, the debate surrounding MDR should be viewed in the context of Digital Public Infrastructure (DPI), financial inclusion, and the long-term financial sustainability of the payment system.
Key takeaways for UPSC
This issue is significant for GS Paper-III (Indian Economy). Study it in conjunction with topics such as UPI, NPCI, the PSS Act 2007, MDR, digital payments, financial inclusion, Digital Public Infrastructure, and FinTech regulation. For the examination, specifically remember that P2P UPI transactions are free; MDR is a concept related to the merchant side; the PSS Act serves as the primary legal framework for payment systems; and UPI operates through an ecosystem led by the NPCI. The objective of maintaining zero MDR on UPI in the current system has been to make digital payments widespread and affordable.
