India has moved a step closer to reintroducing merchant fees on transactions made through its popular Unified Payments Interface (UPI) after proposed changes to the country's payments laws were introduced in parliament on Tuesday.
UPI, among the largest real-time payment networks globally, handled 23.6 billion transactions totaling 29.9 trillion rupees ($313.5 billion) in July, according to official figures.
Walmart-owned PhonePe and Alphabet’s Google Pay are the leading platforms facilitating payments through UPI.
Industry leaders have repeatedly contended that maintaining growth in digital payments has become more difficult because payment companies do not earn fees on UPI transactions, which restricts their capacity to reinvest in the ecosystem.
According to industry and regulatory sources, an amendment to India’s Payment and Settlement Systems Act, introduced in parliament by Finance Minister Nirmala Sitharaman, would permit the imposition of a merchant discount rate (MDR) on digital payments.
According to the sources, the amendment establishes a legal foundation for imposing an MDR, but no decision has been reached yet regarding the fee levels or the specific areas where they would be implemented.
An MDR is a charge that merchants pay to banks and payment service providers for handling digital payments.
In India, credit card transactions generally incur an MDR of around 1.5% and debit card transactions up to 0.9%, whereas UPI payments are presently free for merchants.
Two broad options are being discussed by the policymakers, according sources with direct knowledge of the matter:
charging an MDR on transactions above a specified threshold
levying fees based on a merchant's annual turnover.
According to the sources, one proposal suggests imposing fees solely on large merchants while maintaining UPI payments at no cost for consumers and small businesses.
According to a government source, authorities are weighing a proposal to levy an MDR of 0.3% to 0.5% on transactions exceeding 2,000 rupees ($20.97) for merchants whose annual turnover is greater than 15 million rupees.
A Jefferies report released on Tuesday noted that payments exceeding 2,000 rupees represent only 4% of merchant transaction volumes, yet they make up roughly 67% of the total transaction value.
The brokerage projected that this step could generate a revenue pool of 50 billion to 100 billion rupees for the payments sector and advantage firms such as Paytm, opens new tab, and Pine Labs.