Proposed UPI MDR framework could push small vendors back to cash, finds ISB study

The proposed Merchant Discount Rate (MDR) framework for UPI payments could impact street vendors who make payments exceeding ₹2,000 to procure supplies. According to a study by the Indian School of Business (ISB), this may prompt vendors to shift to cash transactions or pass additional costs on to customers.

Titled ‘UPI Utilisation and MDR Awareness Among Street Vendors’, the study was conducted by the Centre for Analytical Finance (CAF) of ISB. It is based on a survey of 722 street vendors across 14 States and Union Territories, covering 64 urban local bodies. The research examined UPI adoption, awareness of the proposed MDR framework, and vendor responses to potential transaction charges.

The findings were announced at a press conference by CAF Director Prasnna Tantri and co-authors Anand Sudhakaran and Mohan Ramnath. While 67 percent of surveyed street vendors accepted UPI payments, only 52 percent had heard about the proposed MDR framework. The framework, announced in September, proposed a 0.4 percent charge on transactions above ₹2,000, while exempting small merchants receiving up to ₹1 lakh per month through QR-based payments.

The rollout, originally scheduled for October 15, was postponed by the National Payments Corporation of India (NPCI) until after Diwali, with a new implementation date yet to be notified. The survey itself was conducted telephonically between September 24 and October 10.

The study found that 45 to 53 percent of participants across city tiers would reduce UPI acceptance if charges were applied. Charges on vendors' larger payments to suppliers could affect them even when their own sales remain exempt. Nearly 70 percent of surveyed vendors make supplier payments exceeding ₹2,000 at a time, placing these transactions within the threshold covered by the framework. Furthermore, 10 percent of vendors reported that suppliers had asked them to pay additional charges for UPI transactions in the ten days preceding the survey.

Among respondents, 53 percent of vendors in Tier 1 cities and 45 percent each in Tier 2 and Tier 3 indicated they would reduce UPI acceptance if MDR were applied. Additionally, 30 percent of surveyed vendors in Tier 1 cities indicated they would pass the charge on to customers, compared to 14 percent in Tier 2 and 19 percent in Tier 3. Such responses highlight the need for greater awareness of regulations prohibiting merchants from adding MDR charges to customer bills.

UPI adoption varied across city tiers, with 82 percent of vendors in Tier 1 cities accepting digital payments, compared to 66 percent in Tier 2 and 64 percent in Tier 3. Awareness of the proposed charges also varied, with 66 percent of Tier 1 vendors having heard of them, compared to 55 percent in Tier 2 and 47 percent in Tier 3.

The CAF study calls for caution in implementing the framework. While transaction-size-based exemptions protect small merchants at the retail level, they do not account for wholesale procurement costs. If suppliers pass on these charges, vendors could face pressure on limited margins, making cash more attractive. The CAF recommended introducing proposed charges through limited pilot studies and conducting an independently reviewed account of the actual costs of operating UPI before a wider rollout.

"The findings from the ISB study highlight a critical friction point between digital payment adoption and operational costs for small businesses. While retail-level exemptions provide initial relief, the cascading effect of wholesale procurement charges can distort merchant behavior and unintentionally drive a return to cash. Policymakers and payment networks must carefully evaluate supply-chain transaction costs and ensure transparent communication to safeguard financial inclusion and maintain trust in digital ecosystems." — Dr. Shishir Gupta, Founder & CEO, StartupLanes