With the amendment to the Payment and Settlement Systems Act, 2007, which enables the government to levy charges on banks and service providers for UPI transactions, questions emerge on the central idea of free transactions envisioned under the digital regime.
The government has clarified that person-to-person transactions will remain free, and any future Merchant Discount Rate (MDR), enabled by the legislation, will apply only to a specific category of merchant transactions. It is reported that transactions of Rs 2,000 and above may attract costs, which are yet to be determined. According to NPCI data, 86% of UPI transactions involve Rs 500 or less, and those between Rs 501 and Rs 2,000 account for 10%. Only 4% of transactions involve Rs 2,000 and more, though they constitute around two-thirds of UPI payments by value.
The argument for imposing an MDR is that banks and payment processors have borne the costs of maintaining and upgrading the UPI infrastructure since the system went free in 2020. While the government's incentive scheme covers a part of the costs, banks and payment operators have highlighted their burden, which they see as disproportionate. Reserve Bank of India (RBI) Governor Sanjay Malhotra recently said, "Someone will have to pay" for these transactions. The demand for an MDR regime has grown with the steady expansion of the UPI footprint. UPI is a major Indian success story that has transformed financial transactions. With 640 million daily transactions, it has emerged as the world's largest real-time digital payment system and has significantly helped the country move towards its stated objective of a cashless economy.
Parliament clears taxation bill, Sitharaman says UPI transactions to remain free for consumersThis makes it imperative that the UPI services continue to be free for most of its users. It is stated that the MDR will be limited only to merchants, who may be tempted to recoup this cost under various pretexts. The cost of this change should not be passed on to customers. The government should establish robust, transparent provisions to prevent any such attempt. A failure here can prove costly, pushing people back to cash payments. It is also important to look closely at the claim that transactions for customers are "free". A part of the subsidy that the government extends to the scheme is met with taxes paid by citizens, through substantial budgetary allocations. Access and affordability have steered the UPI system to the success it has achieved. Policy revisions must stay true to these foundational principles.