MDR on UPI Payments Could Push Small Merchants Back to Cash

An Indian School of Business (ISB) study has warned that imposing a Merchant Discount Rate (MDR) on UPI transactions exceeding Rs. 2,000 could prompt small merchants to return to cash payments. While small businesses accepting payments of up to Rs. 2,000 from customers are exempt from MDR, they may still face a 0.4% charge on payments exceeding that amount when purchasing goods from suppliers. Suppliers could pass on this cost to small merchants, adding to their financial burden. According to the study, 53% of merchants in major cities and 45% in smaller cities said they would reduce UPI payment acceptance if MDR were introduced. The Centre for Analytical Finance (CAF) at ISB surveyed 722 street vendors across 64 towns in 14 states and Union Territories. While 67% of those surveyed accepted UPI payments, only 52% were aware of MDR.

Merchants May Pass on Charges to Customers

A proposal under consideration is to exempt small merchants receiving up to Rs. 1 lakh a month through UPI from MDR. However, if the charge is imposed on them, 30% of merchants in major cities, 14% in Tier-II towns and 19% in Tier-III towns said they would pass the cost on to customers. Some also indicated that they would ask customers to pay in cash instead. UPI adoption among merchants stood at 82% in major cities, 66% in Tier-II towns and 64% in Tier-III towns. The ISB report cautioned that small businesses moving away from digital transactions could also face difficulties accessing bank loans. It recommended testing the proposed MDR system on a limited scale before implementation. The report suggested monitoring the impact on suppliers and customers, along with changes in cash transactions, before deciding how the additional cost should be distributed.