Badly-designed tiers make MDR a contentious issue

If UPI is thought of as a highway or a platform, at some point, those who built it (the government in this case) will ask merchants to pay for it. Very simply put, this is the Merchant Discount Rate (MDR) and everyone appears to be upset about it

Imagine you are a contractor and build a highway. After doing it, you make money by asking service providers such as restaurants, fuel stations, garages or any other service provider to pay you for the privilege to offer their services. In much the same way, restaurants pay platforms such as Swiggy or Zomato a fee for the ability to access more consumers. No one complains.

Badly-designed tiers make MDR a contentious issue

In much the same way, if UPI is thought of as a highway or a platform, at some point, those who built it (the government in this case) will ask merchants to pay for it. Very simply put, this is the Merchant Discount Rate (MDR) and everyone appears to be upset about it.

But it was only a matter of time before this would be levied. “There is no new argument here,” says a board member at the National Payments Corporation of India (NPCI) unwilling to be quoted by name. The NPCI operates and manages that country’s payment systems including UPI. The idea was always that once UPI became a habit, a charge, small enough to not make people flinch, would be applied.

The devil though lies in the infuriating details. From 15 October, you buy something for ₹2,000 or less and the merchant pays nothing. Buy something for more than ₹2,000 and the shop pays a small cut: 40 paise on every ₹100. So ₹12 on a ₹3,000 bill, ₹200 on a ₹50,000 bill. If the bill is ₹75,000 or more, that cut stops rising. The most the shop pays on one payment is ₹300. And so on and so forth.

But the customer will not see a fee. The shop will. That is the whole official story. Fact of the matter also is that when merchants pay, they pass it on to the customer. This, however, is the least interesting part of it all.

Because the thing about MDR is that it is not a mystery. Credit card companies such as Visa and Mastercard charge between 1-3% and Indian commerce did not collapse. But most small or medium sized merchants don’t like it because they believe this is too high.

Now, the board member quoted above says, “Everybody is on board including the flower seller down the road.” But what people find it difficult to comprehend are the different kinds of slabs that have been imposed. “This is how you begin to kill a well-designed system” argues an exasperated member of the founding team that worked on Aadhaar and India Stack. UPI is a part of that. His point is this payment system did not become a national habit just because it was free. It became one because of how it is designed.

The first problem he points to is the complexity of the fees and the structures. To get past the MDR being imposed, he is convinced most Indian merchants will simply deploy multiple QR codes across different names to get their payments in. He forecasts scenarios only Indians can think up: A ₹2,200 bill that becomes two scans. This is just one way to subvert the system

The other problem, he argues, is that UPI is part of a system. Banks, apps, merchants and citizens were supposed to meet on it. The payment was not supposed to belong to one app or one bank. Value was supposed to show up across the Stack — in new firms, in credit, in software — and it was intended to be captured in many places, not harvested as a single fee.

Is this a mess that could have been avoided?

The NPCI member’s answer is blunt. These slabs help nobody. Charge a rupee. Charge fifty paise. Charge it on every payment that is meant to be charged, and stop inventing categories. A shopkeeper can count. He cannot, and will not, sit with 0.4 per cent, a ₹300 cap, a ₹5 utility rate and a monthly lakh. Give him a number so small that splitting the firm costs more than paying the fee. That is the only design that survives contact with an Indian counter.

The other warning comes from the man who worked to build the stack. UPI was not a product looking for a price list. It was a rail. Other countries noticed. Pix from Brazil noticed and copied it. If this gazette is what India now offers as the grown-up version of UPI, the world will look at Brazil as the model to emulate. In any case, all pointers indicate things are headed that way. What is truly unfortunate is that nobody needed this to be free forever.