"Parliamentary Panel Flags UPI Cost Gap, Proposes Tiered MDR Framework"
Merchant Discount Rate (MDR)
Fee a merchant pays to its bank for accepting digital payments, split among acquiring bank, issuing bank, and payment network.
Section 10A, PSS Act
Provision inserted by Finance Act, 2020, that removed MDR on UPI and RuPay; later amended to an enabling provision allowing future charges.
India's digital payments ecosystem is built on the Payment and Settlement Systems (PSS) Act, 2007, which gives the Reserve Bank of India (RBI) authority to regulate payment systems. The National Payments Corporation of India (NPCI), incorporated in 2008 as a not-for-profit umbrella body under the PSS Act, operates UPI and the RuPay card network. UPI was launched in 2016 and works on an open, protocol-based architecture. Any UPI-enabled app can move money between any two bank accounts instantly, without physical terminals or card issuance.
The Merchant Discount Rate (MDR) is the fee a merchant pays to its bank for accepting digital payments. It is split among the acquiring bank, the issuing bank, and the payment network. For UPI and RuPay, the government removed MDR through Section 10A of the PSS Act, inserted by the Finance Act, 2020. This made UPI free for both merchants and consumers. The government compensated banks and payment providers through a direct incentive scheme. A subsequent amendment to Section 10A replaced the outright bar on charges with an enabling provision, allowing the government to notify future charges. No charge exists today, but the policy debate has been formally reopened.
UPI's cost structure is fundamentally different from card networks. NPCI operates the entire UPI switch for approximately Rs 500 crore per year, translating to roughly two paise per transaction. Card networks, by contrast, involve physical point-of-sale terminals, card issuance, and credit risk underwriting, costs that justified MDR historically. Applying a card-style MDR to UPI ignores this structural difference.
The zero-MDR regime created a specific funding gap. Banks and payment companies absorb operating costs, offset only partly by government subsidy. The Parliamentary Standing Committee on Finance recently cited an industry estimate of approximately Rs 20,700 crore in annual operating costs against a Rs 2,000 crore government allocation. The Department of Financial Services is examining two options: restoring MDR for high-threshold transactions or large merchants, and phasing out government support through a tiered incentive structure. …
Which of the following is a most likely consequence of implementing the 'Unified Payments Interface (UPI)'?
With reference to digital payments, consider the following statements :
1.BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account.
2.While a chip-pin debit card has four factors of authentication, BHIM app has only two factors of authentication.
Which of the statements given above is/are correct?
Which one of the following best describes the key objective of India's 'Open Network for Digital Commerce' (ONDC) initiative?
What is the status of digitalization in the Indian economy? Examine the problems faced in this regard and suggest improvements.
With reference to the Unified Payments Interface (UPI), consider the following statements:
1.UPI is operated by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007.
2.The zero-MDR regime for UPI was established through Section 10A of the PSS Act, inserted by the Finance Act, 2020.
3.NPCI operates the UPI switch at a cost of approximately two paise per transaction.
How many of the above statements are correct?
Consider the following pairs relating to UPI's financial and operational profile:
1.Annual UPI operating costs (industry estimate) — Rs 20,700 crore
2.Government allocation under zero-MDR regime — Rs 2,000 crore
3.Share of UPI merchant payments below Rs 500 — 86 per cent
4.UPI's share of India's digital retail payments — 75 per cent
How many of the above pairs are correctly matched?
Which of the following best describes the key change made to Section 10A of the Payment and Settlement Systems Act, 2007, after its original insertion by the Finance Act, 2020?
With reference to the use of UPI payment data for public planning in India, consider the following statements:
1.PhonePe's PulsePro platform has signed an MoU with MeitY to integrate payment intelligence into PM GatiShakti.
2.Anonymised UPI transaction data can identify geographic areas where digital commerce has outpaced merchant formalisation.
3.The PSS Act, 2007 currently mandates that all UPI transaction data be shared with government planning bodies.
Which of the statements given above is/are correct?
Assertion (A): A uniform Merchant Discount Rate applied across all UPI transactions would be an inappropriate policy instrument for India.
Reason (R): UPI's cost structure of approximately two paise per transaction is fundamentally different from card networks, and 86 per cent of UPI merchant payments are below Rs 500, concentrated among price-sensitive small merchants.
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