The potential return of the merchant discount rate (MDR) on UPI could reduce profits for both mid-size online merchants and payment aggregators alike, according to industry executives.
MDR is the fee businesses pay banks and payment firms to process digital transactions. Card payments always incurred the MDR fee.
Most payment gateway firms have been charging small and medium businesses—such as home bakers, designers, and craftsmen—as well as several upstart direct-to-customer brands, a flat 2 per cent platform or tech fee.
To be sure, UPI was never fully free for these businesses and collecting payments online incurred a charge irrespective of MDR. Any newly introduced MDR is expected to be absorbed at least in part by these businesses, creating a shared burden that could squeeze margins for both entities.
“At mid-end, digital merchants are already being charged around 2 percent by many online PAs. They will see a significant revenue /margin compression or lose share. They will actually take a knock, plus their past practices will now come under RBI audit scrutiny,” said the founder of a PA firm, requesting anonymity.
Transparency and pricing pressure
The founder suggests that regulators might want PAs to be transparent in their pricing to merchants. They may examine if platforms are hiding MDR fees within their 2 percent platform charges, even though official UPI MDR has been zero for more than 6.5 years.
Parliament has passed an amendment that would enable the government or banks to charge MDR for UPI payments for high-value transactions at large merchants. Moneycontrol reported that the MDR rates could be around 25-30 basis points.
To be sure, there is a cost to platform and collecting and settling payments online. Even in the offline world, PhonePe, Paytm, Pine Labs or Innoviti have always charged merchants a monthly subscription fee for their sound box or point of sale (POS) machines.
The impact, however, is unlikely to be uniform across merchants. Large online businesses typically negotiate lower rates with payment aggregators because of their transaction volumes, while smaller and mid-size digital merchants often pay the published rate.
Prominent digital players including Zomato, Swiggy, Flipkart, Amazon, and Zepto have increasingly introduced various levies—categorised as convenience, marketplace, or platform fees—as a means to offset the underlying operational costs associated with digital payment collection.
PA industry faces intense competition
“Overall margin compression will continue regardless of MDR as PGs compete for market share. PAs with smarter processes, better developer experience and a stronger infrastructure core will continue to be at an advantage, especially among small and mid-sized entities,” said Reeju Datta, founder of Cahsfree Payments, one of the large payment aggregators.
The payment aggregator segment has become increasingly competitive, particularly among small and mid-sized online merchants, where pricing is an important factor in winning and retaining transaction volumes. An MDR that cannot be negotiated or avoided could therefore leave payment aggregators with less room to compete on price.
The actual impact will depend on how much of UPI’s transaction value becomes MDR-eligible and how the charge is distributed across the ecosystem. Industry estimates have put the potential MDR pool in the range of Rs 13,500 crore to Rs 16,000 crore annually, depending on the eligible transaction base and the rate eventually imposed.