MDR on UPI – How to build on a brilliant idea and then destroy it?

When UPI was launched it came across a novel idea. However, the kind of growth and popular acceptance that it saw in terms of volumes was unprecedented. Now, they are working hard to destroy the core of UPI.

What exactly was the core of UPI popularity

Just look at the numbers. Between FY17 and FY26, UPI transaction volumes were up 13,000X from 1.78 crore to 24,162 crore transactions. Transaction value via UPI went up from ₹7,000 crore to ₹3,14,00,000 crore; a growth of 4,485X. There were 3 things that have made UPI immensely popular in the last 10 years. The first was simplicity, where you could move money with just an id and a PIN. Second, was speed. The money transfer was instantaneous, irrespective of which part of India the receiver or sender were located. Above all, there were no transaction charges, which was the big UPI cutting edge.

But somebody has to pay for the costs of UPI

That is the standard argument for imposing MDR on UPI. Yes, there is a cost. That is a reality. But the real myth is that nobody is paying for it. Today, a bank account holder gets charged for visiting a branch too often and also for withdrawing from the ATM too often. In the last 1 year, banks collected ₹7,500 crore from savings accounts as minimum balance charges. In addition, when rates go up, loan rates go up but deposit rates never go up in tandem. That is again a cost. In the last 10 years, banks wrote off ₹12,30,000 crore of big business loans. That is against a cost that depositors have indirectly paid for. Now asking people to again pay for UPI transfers is, perhaps, the daftest thing to do!

MDR only on P2M, above a threshold, on merchants

These are 3 arguments that are given to prove that the MDR on UPI will not hit the masses. Firstly, it is only on P2M transactions and not on P2P transfers. Secondly, it is only above the threshold of ₹2,000, so it leaves 95% of users out of MDR. Lastly, the MDR is a levy on the merchants and not a levy on the consumes. All the above 3 arguments are flawed. Any arbitrage will result in people exploiting the loophole and government moving in to plug it. For instance, merchants will take P2P transfers of money and will also split purchases above ₹2,000. Soon, they will all be brought under MDR. Also, when MDR is levied on merchants, they will pass it on to users; directly or indirectly!

What Ronald Reagan said over 4 decades ago

The former US president famously described the government approach to business, “If it moves, tax it; if it continues moving, regulate it; and if it stops moving, then subsidize it.” In the Indian context, the taxation and regulation of UPI is coming at the wrong time. For the first time, a novel payment system has become a mass product in India. It is forcing millions of the unbanked to open bank accounts and get included in the financial mainstream. UPI has enabled small traders to avoid the use of cash and transact bank-to-bank, making them part of the formal economy. These are priceless for any economy. Government had promised that UPI will be free. Now, it has to honour that promise!