RBI Paper On Payment Charges Reignites Debate Over Zero MDR Policy

This article discusses the impact of and alternatives to the zero MDR policy in the context of the RBI discussion paper on payment charges.

In August 2022, the RBI released a discussion paper on payment charges. For fintech players, the paper's observations about UPI are particularly relevant. The RBI has sought public comments on whether charges should be (a) levied on UPI transactions, (b) based on transaction value, and (c) fixed by regulation or market forces?

Before we answer these questions, a quick primer on how peer-to-merchant (P2M) payments work in India. Customers typically pay merchants through debit cards, credit cards, prepaid payment instruments (PPIs) and UPI. To accept payments from customers, merchants pay a fee to their bank or payment aggregator (PA). This fee is called Merchant Discount Rate (MDR). The MDR varies depending on the payment method used. For e.g., the MDR for debit cards is capped between 0.3-0.9% depending on the merchant's