Context
A Parliamentary Standing Committee on Finance has suggested making UPI financially self-sustaining, including options such as MDR on selected transactions or a tiered incentive model.
What is UPI?
- UPI (Unified Payments Interface), developed by NPCI, enables real-time bank-to-bank digital payments through UPI IDs, mobile numbers and QR codes.
- It supports both P2P (Person-to-Person) and P2M (Person-to-Merchant) transactions.
What is Merchant Discount Rate (MDR)?
- MDR is a fee charged to a merchant for accepting digital payments.
- It is generally shared among participants involved in processing the transaction, including the payment service provider, acquiring bank, issuing bank and payment network, depending on the payment instrument.
Zero-MDR Regime for UPI
- Since January 2020, MDR has not been permitted on notified UPI and RuPay debit-card transactions.
- The zero-MDR policy helped promote low-cost digital payments and financial inclusion, particularly among small merchants.
- However, payment infrastructure involves costs related to technology, cybersecurity, fraud prevention, network capacity and customer support.
Why is UPI Sustainability an Issue?
- Rising Operational Costs: Digital payment infrastructure requires continuous investment in technology and cybersecurity.
- Zero-MDR Model: Merchants do not pay MDR on eligible UPI transactions, limiting direct revenue for the ecosystem.
- Fiscal Burden: Government incentives are required to partly compensate ecosystem participants.
- Scale of Transactions: The rapid expansion of UPI increases the need for robust infrastructure and fraud-prevention mechanisms.
Q. With reference to the Merchant Discount Rate (MDR) and UPI, consider the following statements:
1. MDR is a fee associated with accepting digital payments by merchants.
2. UPI was developed by the National Payments Corporation of India (NPCI).
3. Since January 2020, MDR has not been permitted on notified UPI transactions.
4. The government provides incentives for eligible low-value BHIM-UPI Person-to-Merchant transactions.
Which of the statements given above are correct?
(a) 1, 2 and 3 only
(b) 1, 2 and 4 only
(c) 2, 3 and 4 only
(d) 1, 2, 3 and 4
Answer: (d) 1, 2, 3 and 4
Explanation
• Statement 1: Correct. MDR is a fee associated with processing digital payments accepted by merchants.
• Statement 2: Correct. UPI was developed by NPCI, the umbrella organisation for retail payment systems in India.
• Statement 3: Correct. The government directed that MDR should not be collected on notified UPI and RuPay debit-card transactions from January 2020.
• Statement 4: Correct. The government operates incentive schemes for eligible low-value BHIM-UPI P2M transactions to support the zero-MDR ecosystem.