Parliamentary Panel Suggests Tiered UPI Charges To Sustain Digital Payments

The Parliamentary Standing Committee on Finance has suggested that the government explore a tiered charging mechanism for Unified Payments Interface (UPI) transactions for the digital payments sector to remain financially sustainable without burdening small merchants.

The committee has suggested that street vendors and other small merchants be allowed to continue enjoying free UPI services. On the other hand, larger merchants and banks could be charged a fee for the services provided by UPI. This is because these parties will be able to bear the cost of the services provided by the Unified Payments Interface.

UPI has become the backbone for digital payments over the last few years. UPI has transformed the way users transfer money from one account to another. The Unified Payments Interface has become a huge success for digital payments in the country.

Zero MDR Policy And Government Support

The Department of Financial Services (DFS) has said that the government has already introduced a zero Merchant Discount Rate (MDR) policy for UPI and Rupay debit card transactions in January 2020. It is the fee that merchants pay to payment systems for digital transactions. This fee helps them maintain the cost of the services they provide.

The government has taken the step of removing MDR to encourage the adoption of digital payments. However, the absence of MDR has proved to be a hindrance for the banking sector to gain from the operations.

In order to resolve the problem for the banking sector, the government has introduced the Incentive Scheme for Promotion of RuPay Debit Cards and Low-Value BHIM UPI Transactions for the financial year 2021-22. The government has introduced the scheme to incentivise the RuPay debit card transactions as well as UPI merchant payments up to an amount of Rs 2,000.

The centre has also allocated Rs 2,000 crore for the scheme in FY27. The allocated amount is slightly less than the allocation of Rs 2,200 crore for FY26. The incentives under the scheme account for just 11 per cent of the total cost incurred, as well as 14 per cent of the potential MDR that could be raised if the government allowed the charges on the transactions.

Challenges And Future Growth

DFS has also reported that the digital payments sector has witnessed significant growth in urban areas. However, the growth has been low in the rural areas. The government has introduced the incentive scheme with a cashback component to encourage merchants to adopt the digital payment systems. The government has to expand the digital payment systems to the rural areas.

Expansion Challenges And Future Growth

Various stakeholders of the UPI system have been investing considerably in technology infrastructure, cybersecurity, distribution networks, and customer support services. The government has also introduced a multi-year incentive framework to enable the various stakeholders to expand their operations to underserved areas.

Although the annual growth rate of UPI transactions was expected to decelerate to 25 per cent in FY 2025-26 from 42 per cent in FY 2024-25, the growth prospects are huge. The DFS report suggests that the platform is expected to grow almost tenfold in the coming years.

Over the next 5-7 years, UPI is expected to acquire 600 million new users, including smartphone and feature phone users. During the same period, the platform is expected to process between 100 billion and 150 billion transactions every month.

However, the department has also cautioned that the digital payments platform is also expected to face a structural financial gap if the government does not provide sufficient funding. The structural financial gap is also expected to impact the growth of digital payments in the coming years.