1. Incentives to Recover MDR

The prohibition does not remove the merchant’s incentive to recover 0.4% MDR (Merchant Discount Rate); it changes the channel through which the cost may be recovered. A merchant may absorb the cost, seek lower supplier costs, reduce discounts, or subtly differentiate prices. Consumers should watch for “cash discounts,” UPI-specific fees, altered menu prices, minimum purchase requirements, or nudges towards cash or cards. Such practices may be commercially understandable, but where rules prohibit passing MDR charges to customers, explicit surcharges or disguised recovery should be scrutinised, especially when the final price differs by payment method.

2. Possible Pricing Responses

The economic incidence of MDR can differ from the legal form of the charge. A merchant could raise the common sticker price, spreading the cost across all customers; alternatively, it could offer a cash/card discount or impose a separate service fee. These mechanisms have different distributional effects.

A general price increase makes non-UPI users contribute too, while a payment-linked fee concentrates the burden on UPI users. Competitive intensity, transparency, accounting systems and customer sensitivity will determine which strategy, if any, merchants adopt in practice.

3. Economic Equivalence and Affected Businesses

Economically, a general price increase, reduced discount, or payment-linked fee can all shift MDR costs onto consumers, even if the invoice does not identify it. At 0.4%, the direct cost is ₹4 per ₹1,000, but cumulative costs matter for thin-margin businesses.

The impact would be greater where UPI transactions are large and frequent—such as retail chains, jewellery, automobiles, travel and other higher-ticket merchants—while small merchants remain protected by exemptions. The ₹300 cap limits exposure on very large payments, moderating incentives to switch payment methods.

4. Possibility of Two-Tier Pricing

A two-tier pricing structure is plausible if merchants preserve a common headline price but vary discounts by payment method. Economically, this is price discrimination: the merchant offers a lower effective price for cash or another payment instrument while retaining the same listed price.

Consumers would face less transparent comparisons and may choose payment methods based on discounts rather than convenience. Such practices could disadvantage consumers who prefer UPI payments for records or security. Monitoring transaction-level pricing will therefore matter more than headline prices when assessing the MDR’s real incidence.

5. Does the 4% Figure Understate the Impact?

The government’s 96% figure is a transaction-count measure: approximately 96% of P2M (Person-to-Merchant) transactions remain unaffected because payments up to ₹2,000 and specified zero-MDR categories are excluded.

But transaction counts alone cannot reveal the economic incidence of MDR. High-value payments may represent a much larger share of P2M transaction value than their transaction share. The ₹75,000 cap also changes the effective rate for very large payments.

Assessing the impact therefore requires both transaction volume and transaction value distributions; without those data, 4% should not be interpreted as 4% of economic value.

6. Could Consumers Ultimately Bear the Cost?

Yes, this is economically possible. If merchants raise broad prices rather than visibly charging UPI users, MDR becomes part of general operating costs and consumers may not identify its source.

Pass-through will depend on competition, profit margins, demand elasticity and merchants’ ability to differentiate prices. However, merchants may also absorb the cost or offset it elsewhere.

The policy question is therefore incidence—who ultimately bears the cost of sustaining UPI—not merely who is formally charged. Evidence after implementation will be needed to measure MDR pass-through to consumers, changes in merchant pricing behaviour, and the broader consumer impact of merchant payment charges.

Dr. Manoranjan Sharma, Chief Economist, Infomerics Ratings