MDR fee on UPI: Why opposition's arguments are weak

An AI-generated image of a customer making
a payment at a retail store using UPI.

There is a debate currently underway in India after the Union government on Monday introduced what is called MDR, or Merchant Discount Rate, for retail purchases above Rs 2,000 using UPI. 

UPI or Unified Payments Interface, is a money-transaction platform developed in India in 2016. UPI allows people to send money from their bank account directly to another person's bank account using a mobile app. All that is needed is the recipient's mobile phone number or their UPI ID or a QR code that embeds the account details.

CASHLESS IN INDIA

UPI is hugely popular in India, making all transactions — ranging from very small amounts to high value — cashless. Last month the platform processed a record 24.51 billion transactions worth ₹29.82 lakh crore, which is roughly the equivalent of $311 billion, £232 billion or €270 billion.

What the government's decision on Monday means is that from October 15, if I have to pay an amount of more than Rs 2,000 at a large retail store and I choose to pay by UPI, the store owner (not I) will have to pay a small fee to payment facilitators like banks and tech platforms.

An MDR already exists for credit and debit card transactions for any amount, which varies between 1.5% and 2.5%. The amount the merchant has to pay is not capped. For UPI, the MDR is 0.4% and that too only for transactions above Rs 2,000. It is capped at Rs 300.

The government introduced the 0.4% levy to generate funds for the maintenance of the entire payment infrastructure, especially as the volume of UPI transactions has been growing exponentially. In fact, almost every month or two, a new record for the number of transactions and the volume of money transferred is set. The government as well as technology companies say they need funds to make the system more robust and secure. That's understandable.

The opposition, mainly the Congress, has opposed the government's decision and asked for the MDR to be rolled back.

Here is what the opposition has been saying:

ONE

The opposition parties are making it appear as if customers will have to pay this extra fee called MDR.

It is not the customers, but businesses, specifically large ones. Small vendors have been exempted, so too person-to-person transactions, irrespective of the amount.

TWO

The opposition says UPI was always free, there was never an MDR; and once the government realised UPI had caught on in a huge manner, they introduced a fee. 

This is not factually correct. When UPI was introduced in 2016, there was an MDR. It was only during COVID, from January 1, 2020, that the MDR was waived, with the government covering the costs incurred by banks.

THREE

The opposition says businesses will pass the extra fee on to customers. 

This is very unlikely because it is illegal to do so according to the government notification. Large businesses that have to pay the MDR have the trade volume bandwidth to absorb the fee. Also, if these businesses never passed on the fee when customers chose to pay by card, why would they do it now for UPI? If businesses pass the buck, then the opposition will have a clear reason to protest, not now.

FOUR

The opposition says the government is trying to help card companies like Visa and Mastercard by introducing an MDR for UPI. 

It is true that the businesses of Visa and Mastercard have been hit after UPI became popular, but the opposition has not explained how an MDR for UPI will help Visa and Mastercard.

It is also true that the top two UPI companies are PhonePe and Google Pay. PhonePe, which is now owned by Walmart holding an 85% stake, was founded in 2015 by two Indian entrepreneurs before changing hands. Google Pay in India is managed and operated by Google India Digital Services Private Limited, a wholly owned subsidiary of Google.

If people are happy to use these American apps, what is wrong with those companies making some money?

FIVE

The opposition says US pressure is behind the government's decision. 

I do not know how the American government will benefit from this. If anyone benefits, it is the Indian government, Indian banks, and the many smaller Indian technology companies that are part of the vast UPI infrastructure.

REAL REASONS FOR PUSHBACK

Though I do not find any substantial merit in the opposition's arguments, I do understand why the government's decision has kicked up such a row.

UPI arrived only in 2016, but long before that, credit and debit cards were being used at large retail stores and for online transactions. In fact, I had stopped using cash long before UPI arrived.

My logic was simple: why withdraw cash from an ATM and pay the cashier at the store when I can pay the cashier directly from my bank account using a debit card? For large-value transactions, I use credit card.

However, the number of people who used cards was, and still is, relatively small. That is where UPI has made the difference. Unlike credit and debit cards, UPI replaced cash transactions in a really big way.

Imagine, 24.51 billion transactions across India in a single month of August is a staggeringly huge number (India's population is 1.5 billion). In contrast, there were about 600 million credit card transactions. Incidentally, credit card transactions (which have a much higher MDR) too have been going up though not in the way UPI has been.

So, the real reasons for the opposition's pushback, I think, are simply these two:

1) Even the slightest fee on anything that is widely popular across the country is a political taboo. It triggers a widespread "how dare you do it" sort of protest.

2) When the government levies a fee, there is opposition, but no one cares when private entities charge even hefty amounts. The same people who oppose a small government levy happily pay multiple times that amount when a private entity charges it.

I find nothing wrong with the government introducing this small, capped MDR on large retail businesses. It will only go towards strengthening the burgeoning online money transaction system that has proved to be so user-friendly to millions of Indians.