Parliamentary Panel Advocates Swift MDR Implementation for High-Value UPI Transactions
Parliament has approved amendments to the Payment and Settlement Systems Act, 2007, allowing for the introduction of a Merchant Discount Rate (MDR) on high-value digital transactions. This change aims to enhance the financial viability of the payments ecosystem and reduce the government’s subsidy burden. The amendments empower the government to permit banks and payment service providers to impose charges on transactions made through the Unified Payments Interface (UPI) and other electronic payment methods.
The new legislation removes the previous legal restrictions that prevented banks and payment service providers from charging an MDR on specified digital payment modes. The government intends to implement nominal charges on select digital transactions involving consumers and small businesses. This initiative seeks to create a sustainable revenue framework for banks, payment service providers, and companies that support the digital payments infrastructure in India.
Need for MDR
The Standing Committee on Finance has called for an assessment of the long-term financial viability of defined-benefit and incentive-based schemes. In its report, the Committee highlighted that the Rs 2,000 crore budgetary allocation to compensate for losses from the zero-MDR regime only covers about 10% of the industry’s operational costs. This situation has led to increased demands on the Department of Financial Services.
The Committee previously recommended a self-sustaining, tiered revenue model to ensure the payments ecosystem’s long-term viability without burdening the government. Although legal provisions for a tiered MDR structure have been introduced, concerns remain regarding the significant gap between the budgetary support and the industry’s estimated operational expenditure of Rs 20,700 crore. The report emphasized that delays in implementing the MDR framework could hinder investments in cybersecurity and payment network infrastructure.
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