The government’s decision to introduce a Merchant Discount Rate (MDR) on higher-value transactions through the Unified Payments Interface (UPI) marks a shift in the way the country’s primary digital payment network is funded, after years of concerns from the payment sector that the annual funding allocated for UPI did not match the actual cost of operating it.Starting October 15, a 0.4 per cent MDR will be imposed on UPI transactions from individuals to merchants exceeding Rs 2,000. Merchants, not consumers, will pay the fee, which will be capped at Rs 300 for transactions of Rs 75,000 and above.Transactions between individuals and most daily merchant payments will continue to be cost-free.The National Payments Corporation of India (NPCI), which manages the UPI network, stated that the revenue will help fund infrastructure resilience, cybersecurity, fraud prevention, innovation and customer service.“The MDR is allocated solely within the UPI ecosystem to enhance infrastructure resilience, innovation, cybersecurity (defending the UPI infrastructure with banks and non-banks), and customer service,” it stated.Overview of new MDR framework for UPIThe 0.4 per cent MDR is applicable to UPI transactions exceeding Rs 2,000 made to retailers.A payment of Rs 5,000 would thus create an MDR of Rs 20, whereas a payment of Rs 50,000 would result in Rs 200. At Rs 75,000, the calculation of 0.4 per cent amounts to Rs 300, beyond which the fee is limited.Vital services — railways, telecom, fuel and insurance — have a uniform charge of Rs 5 for each transaction over Rs 2,000.Transactions in capital markets (mutual funds, stockbroking) incur a reduced rate of 0.02 per cent, with a maximum limit of Rs 300.Small vendors earning up to Rs 1 lakh monthly through UPI QR codes are completely exempt from any new fees — an exemption that officials indicate protects roughly 96 per cent of all merchant transactions.Payments via UPI QR to merchants in rural and semi-urban regions will continue to be without charge. Five per cent of MDR collections will be allocated to a specific fund aimed at increasing UPI acceptance among small vendors.Effects on customers and vendorsThe impact on customers will not be direct. NPCI has stated that the MDR cannot be transferred to consumers. The government has made it clear that UPI app providers are not allowed to charge platform fees or hidden costs, and banks have been recommended to make sure merchants do not transfer the MDR to consumers.The impact on consumers will still rely on how retailers adjust to the increased expenses. A seller that incurs the MDR experiences a slight reduction in its profit; one that modifies prices or alters payment incentives might indirectly transfer part of the expense.