As the government moves to end free UPI payments after six years with 0.4% Merchant Discount Rate, the Retailers Association of India (RAI) on Wednesday reportedly said the move could reverse gains in digital payment adoption among small retailers ahead of the festive season.
This comes after the government introduced a 0.4 per cent fee on transfers worth more than ₹2,000 made to merchants through the platform from October 15, while explicitly ring-fencing everyday person-to-person transactions as well as small payments from any charge.
The MDR, capped at ₹300 for transactions of ₹75,000 and above, keeps consumers outside its ambit but places the cost on merchants, many of whom operate on thin margins, RAI said, news agency PTI reported.
Deep Dive
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"For MSME retailers already running on thin margins, burden creates a straightforward incentive to steer transactions back toward cash," it said.
RAI also warned that the charge "could undo years of progress in digital payment adoption" among India's smallest retailers, just as the festive season gets underway.
"Small merchants will now think twice about whether to accept cash or UPI," said RAI CEO Kumar Rajagopalan.
{{/usCountry}}"Small merchants will now think twice about whether to accept cash or UPI," said RAI CEO Kumar Rajagopalan.
{{/usCountry}}RAI said the shift back to cash would also hurt the government's own formalisation push, as transactions that move off the UPI network no longer feed into GST reporting, the opposite of what a decade of digitisation policy has tried to build.
"This cuts against the government's own formalisation agenda. UPI acceptance should be incentivised, not taxed," Rajagopalan was quoted as saying.
The retail body also raised objection over treating all UPI transactions alike, as it argued that most such payments draw directly from a savings or current account and function as digital debit transactions, without the interchange cost or credit risk that justifies charges on credit networks.
"We do not see the case for charging a bank-to-bank UPI payment the way you'd charge for credit. Where UPI is linked to a credit line, a fee is easier to defend, because the cost structure genuinely resembles a credit product," Rajagopalan was quoted as saying.
RAI further argued that the cost of running the UPI network should not fall on merchants.
"NPCI keeps UPI running for the entire country, RBI or the government should be underwriting that cost, not merchants. The state gets a formal, traceable transaction it can tax out of every UPI payment. It should be paying for the enablement, not passing the bill down to the smallest retailer in the chain," Rajagopalan further said.
Similar concerns were raised by Clothing Manufacturers Association of India (CMAI) who said the MDR on UPI at the beginning of the festive season could not have at a more ‘challenging time for the industry’.
"This period is critical for merchants, retailers and consumer-facing businesses, many of whom are already working hard to revive demand and improve margins," CMAI President Santosh Katariya was quoted as saying.
He further said that adding another cost to digital transactions at this point risks putting further pressure on an ecosystem that is still finding its footing.
"UPI has been a powerful enabler of consumption and formalisation, and any move that increases the cost of acceptance needs to be carefully calibrated, particularly during the most important sales period of the year," Katariya added.
From October 15, merchants accepting UPI payments above ₹2,000 will pay a fee under the new framework, but customers will not have to pay this charge. However, if a person scans a shop's QR code and pay ₹500, ₹1,000 or ₹2,000, the payment remains free. Person-to-person payments also remain free.