The Retailers Association of India (RAI) has warned that the new 0.4% merchant discount rate (MDR) on UPI transactions above ₹2,000 could reverse years of progress in digital payment adoption among small retailers. The fee, introduced on October 15, places the cost on merchants rather than consumers, raising concerns about its impact on cash transactions and formalisation efforts.

The RAI argues that the MDR, capped at ₹300 for transactions over ₹75,000, places an undue burden on small businesses operating on thin margins. RAI CEO Kumar Rajagopalan stated that the fee creates an incentive for merchants to revert to cash, which could undermine the government's formalisation agenda. He also noted that UPI transactions, which often draw directly from savings or current accounts, function as digital debit transactions and should not be subject to the same fees as credit-based payments.

The RAI further contends that the cost of running the UPI network should not fall on merchants. Rajagopalan said that the National Payments Corporation of India (NPCI) operates the UPI system for the entire country, and the cost should be underwritten by the RBI or government, not merchants. He emphasized that the state benefits from the formal, traceable transactions generated by UPI and should bear the cost of enabling the system.

Similar concerns were raised by the Clothing Manufacturers Association of India (CMAI), which warned that the MDR at the start of the festive season could pose a significant challenge for the industry. CMAI President Santosh Katariya noted that the period is critical for merchants and consumer-facing businesses, many of whom are working to revive demand and improve margins. He argued that adding another cost to digital transactions at this time risks further straining an ecosystem still finding its footing.

The new fee applies to merchants accepting UPI payments above ₹2,000, but customers will not bear the cost. Payments of ₹500, ₹1,000, or ₹2,000 remain free, as do person-to-person transactions. However, the RAI and CMAI have raised concerns about the broader implications of the fee, particularly during a crucial sales period for the retail sector.

The impact of the fee on festive season sales and the broader digital adoption trends remains unclear. Further analysis will be needed to assess the long-term effects of the MDR on small retailers and the overall digital payment ecosystem in India.