DC Edit | Will India Go Back to Being a Cashless Economy?

The ubiquitous UPI, which changed the way Indians pay after thousands of years and became one of India’s biggest contributions to the world, will no longer be free, albeit with some exceptions. Starting October 15, merchants will have to pay a 0.4 per cent user fee — also called the Merchant Discount Rate (MDR) — on UPI transactions involving payments of over Rs 2,000.

Though the Unified Payments Interface was launched on April 11, 2016, work on the concept began in 2012, when a group of bankers and industry experts — headed by Nandan Nilekani — came together to design a mobile-first, interoperable payment system. Its success, however, came after the government abolished MDR on UPI transactions on January 1, 2020, to promote cashless transactions.

Within a few years, UPI became hugely successful. Everyone, from street vendors to large retailers, began receiving money instantly through mobile phones. But the cost was borne largely by the government, banks and payment companies. Now, almost 85 per cent of retail transactions in India take place through UPI.

It would be incredibly difficult for any government to alter such a hugely successful model. Banks, which were sharing the cost, however, stepped up pressure on the government to allow them to charge at least those who can afford to pay.

While the government’s decision to introduce an MDR of 0.4 per cent on certain UPI payments from October 15 marks the end of the system’s blanket zero-fee regime, it also ensures that person-to-person transactions remain free.

For other categories, too, MDR will remain highly restricted. It will apply only to person-to-merchant transactions exceeding Rs 2,000 and will be paid by the merchant, not the customer. Small merchants receiving up to Rs 1 lakh a month through UPI QR codes have also been exempted. For essential and low-margin sectors, including railways, fuel, telecom, insurance, utilities, education and agricultural inputs, the charge will be restricted to Rs 5 per transaction. The standard MDR will be capped at Rs 300 on transactions of Rs 75,000 or more. Only about four per cent of merchant transactions are expected to be affected.

The government has ensured that all safeguards are in place to keep the poor and the middle class unaffected by MDR. However, the real challenge will be enforcing these safeguards.

Some merchants seeking to gain a few more rupees may try to recover the fee by imposing a “UPI charge” on all transactions. They could offer discounts for cash payments or split bills into transactions below Rs 2,000. Such practices would undermine both the policy and the gains made towards formalising the economy. The government’s direction that MDR must not be passed on to consumers must be backed by an accessible complaint mechanism and penalties for repeated violations.

If the government fails to manage this transition well, India could revert to being a predominantly cash-based economy. If that happens, the government would be blamed for undermining the hugely successful UPI system for a few rupees. It would be akin to a greedy and overambitious person killing the goose that laid the golden eggs.