New question on the cusp of digital revolution: Is the era of free UPI coming to an end?

The habit of scanning QR codes instead of cash, which millions of Indians have adopted from vegetable stalls to big shopping malls in every corner of the country, is now looming under the cloud of additional costs. A detailed research report by professors at the Indian Institute of Technology Bombay (IIT Bombay) has come out amid discussions on implementing Merchant Discount Rate (MDR) on merchant payments made through Unified Payments Interface (UPI). This report has drawn the attention of both policy-makers and the general public to the fact that even though on paper this fee is imposed only on traders and there is a legal restriction on imposing additional surcharge on customers, due to the actual functioning of the market, its ultimate financial burden will fall on the common man. According to the report, the current proposed rate of 0.40 percent is extremely high and should be immediately reduced to 0.08 percent so that the financial system can meet the expenses without slowing down the pace of Digital India.

Generally, whenever it comes to merchant discount rate on digital payments, it is argued that as per the rules, the shopkeeper cannot charge any additional fee (Convenience Fee or Surcharge) separately from the customer. But an IIT Bombay study reveals the ground reality that cost transfer in retail trade happens through indirect means:

• Hidden increase in prices: Small and medium traders dealing in grocery retail, FMCG and daily consumer goods already operate on a very thin profit margin of 3 to 5 percent. When payment charges of 0.40% are deducted from them, they will simply increase the MRP or retail prices of the goods slightly to compensate for their declining profits.

• Discount on cash and strictness on digital: Many surveys have revealed that more than 80 percent of small traders are not in a position to bear this fee themselves. They may start offering discounts to consumers for paying in cash or flatly refuse to accept UPI on bills above ₹2,000.

• Impact on weaker sections: When prices rise overall, it is most adversely affected by middle-class and low-income families, who rely on UPI for essential commodities like milk, ration and medicines.

Analyzing detailed data, this study by IIT Bombay states that the technical infrastructure of UPI has now reached such a large scale that the operating cost per transaction has reduced significantly. In such a situation, there is no logical basis for imposing a huge fee of 0.40% to keep the system running:

1. Huge rate cut: The study clearly recommends that the MDR rate on UPI should be reduced from 0.40 per cent to just 0.08 per cent (i.e. one-fifth of the current proposed rate).

2. Reconsideration on the part of banks: The report also argues that instead of going into the pockets of banks, a large portion of the revenue from this fee should go directly to those Payment Service Providers (PSPs) and fintech companies who are actually investing heavily in maintaining the UPI infrastructure and technological innovation.

3. Balance of Feasibility: The minimum rate of 0.08% will not put any significant financial pressure on merchants and will avoid passing on any hidden inflation to customers.

The stance of the Reserve Bank of India (RBI) and the National Payments Corporation of India (NPCI) on this entire incident has also been very cautious. Recent statements have clarified that the majority of small everyday payments (which account for more than 90% by volume) remain outside this scope and general consumer payments below ₹2,000 are not being imposed. The RBI Governor has also clarified that the nominal fee is not expected to cause any major decline in the total number of transactions. However, industry experts and economists are concerned that if costs on large transactions (P2M) increase, people will start moving back to the cash economy, which could set back efforts to curb black money and promote digital traceability.

This report of IIT Bombay clearly indicates that to make a national public digital utility (Digital Public Infrastructure) like UPI sustainable, it is necessary to strike a financial balance, but this balance should not be at the cost of the confidence of the common consumer.

• Governments and regulatory bodies should ensure that essential commodities—such as ration, vegetables, medicines and public transport—are completely free from any kind of MDR.

• A clear limit on turnover based exemption should be set for small traders so that street shopkeepers are not forced to remove the digital QR code.

• Government budgetary subsidies or a minimum technology fee (0.08% as suggested by IIT Bombay) may be the route to be taken to defray the infrastructure costs of fintech companies and banks. If these practical concerns are not addressed at the policy level in time, India’s most successful digital payments revolution may get entangled in unwanted controversies and the burden of rising inflation on the common man’s wallet.