IIT-B Report Calls for UPI MDR Reduction to 0.08%

India's top financial institutions are facing a new challenge as a report by IIT-Bombay suggests that the Merchant Discount Rate (MDR) on merchant UPI transactions should be reduced to 0.08% from the current 0.40%. The report, authored by professors Ashish Das and Pragya Das, argues that third-party application providers and payment service providers should receive compensation for their services.

The study recommends setting the MDR share for third-party application providers at 0.06%. Lower than the 0.08% proposed by the National Payments Corporation of India (NPCI). Meanwhile, keeping the PSP share unchanged at 0.02%. Under the existing arrangement, banks that issue and acquire transactions collectively receive the bulk of the revenue, with a 70% share split between them.

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The report also questioned the reasonableness of transaction charges on high-value UPI payments. Recommending a digital payment fee on online merchant transactions involving purchases of goods or services from e-commerce companies.

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According to the report, introducing a digital payment fee on online purchases could help generate revenue for the UPI ecosystem. The NPCI's MDR circular, issued last month, applies a merchant discount rate of 0.4% to person-to-merchant UPI transactions exceeding Rs 2,000.

What does the NPCI's MDR circular say? Under the circular, a merchant discount rate of 0.4% will apply to person-to-merchant UPI transactions exceeding Rs 2,000. The fee will be borne by merchants rather than consumers.

For transactions worth Rs 75,000 or more, the charge will be capped at Rs 300.