10/08/26, UPI-MDR

E-commerce and other consumer internet companies could face higher payment costs on some UPI transactions if the government introduces a Merchant Discount Rate (MDR), with the eventual impact depending on the transaction threshold, the merchants covered and who ultimately bears the charge.

MDR is a fee charged on a digital payment transaction, typically paid by the merchant to the payment ecosystem for processing the transaction. Under a potential UPI framework, the charge could apply to purchases above a specified transaction threshold  such as Rs 2,000, although the government has not yet finalised the threshold, rate or merchant categories that would be covered.

The Finance Ministry has said any future charge would be nominal and limited to a select category of merchant transactions, with consumers and most merchants expected to remain outside the levy.

Several industry executives and legal experts Moneycontrol spoke with said the impact on consumer internet companies could extend beyond payment processing costs, with e-commerce platforms and sellers potentially facing higher costs.

“Any MDR on UPI would have a very direct, first-order impact on e-commerce, particularly on margins and pricing. If the product pricing is above the proposed MDR threshold, shopping on these websites could become more expensive because merchants operating on thin margins are likely to pass on at least some of that additional cost,” a senior executive at a consumer internet company said.

The impact, however, remains contingent on the final framework. The government has not yet specified the MDR rate, the transaction-value threshold or the merchant categories that could be covered, and it is not clear whether e-commerce transactions above any eventual threshold would ultimately attract a charge.

To be sure, purchases on marketplaces that focus on low-value items could see limited impact if the eventual MDR framework applies only above a certain transaction threshold. As a result, quick commerce and food delivery could be less exposed if the framework targets higher-value transactions.

Who is the merchant?

For e-commerce marketplaces, the impact will depend partly on who is treated as the merchant. If an individual seller is directly onboarded with the payment provider and receives the settlement, the seller could be liable. If the marketplace collects the payment before settling with the seller, the platform could be treated as the merchant.

Prashanth Ramdas, partner at law firm Khaitan & Co, said the framework should look at the actual payment and settlement structure rather than apply a uniform definition across marketplaces.

“For a future MDR framework, regulators should, therefore, have a functional approach to defining a merchant, by reference to the payee, settlement recipient, merchant onboarding and marketplace collection model instead of using a single label for all e-commerce transactions,” Ramdas said.

However, the entity initially liable for MDR may not ultimately bear the cost. A platform could absorb it or pass it on to sellers, while a directly liable seller could factor it into pricing.

The exposure will also vary by business. E-commerce platforms have a wide range of transaction values, including smartphones, electronics and appliances. Quick commerce and food delivery are dominated by lower-value transactions. If MDR is restricted to higher-value payments, much of their routine order volume could remain outside the levy.

Amazon, Flipkart, Meesho, Eternal, Swiggy and Zepto did not respond to queries sent by Moneycontrol.

MSMEs could feel the squeeze

The bigger concern for e-commerce could be what happens to the millions of sellers operating on marketplaces. For a micro, small and medium enterprise (MSME) or direct-to-consuner (D2C) brand already paying marketplace commissions, logistics, fulfilment, advertising and returns-related costs, MDR would add another cost to selling online.

“An e-commerce marketplace is an ecosystem of lakhs of independent MSMEs, entrepreneurs, artisans and D2C brands. Payment acceptance costs ultimately become part of the cost of doing business for marketplace sellers,” said another industry executive, on the condition of anonymity.

If MDR charges add to the cost of transactions, consumers may shift back to cash or other payment methods, potentially undermining the broader push towards digital payments.

“It also raises questions around digital adoption, seller growth and the broader ease of doing business.”

The cost would have to be absorbed somewhere. Platforms could take the hit, sellers could see margins squeezed, or businesses could factor the additional cost into prices. For smaller sellers, the implications could extend beyond margins to how much they invest in online channels.

“Digital commerce has evolved around a frictionless payments architecture. Any change in payment economics becomes another input cost for sellers, particularly MSMEs that operate on marketplaces,” a third executive said. “Over time, businesses either absorb that cost, pass it on or change behaviour.”

The impact could show up in seller economics, pricing, digital adoption and investment in online channels.

Cash could become king

The biggest policy question is whether MDR can be introduced without raising costs for the smallest merchants. For marketplace sellers, any new payment charge would come on top of commissions, logistics, fulfilment, advertising and compliance costs.

“MSME and D2C sellers get a flat, non-negotiable pass-through stacked on existing commission and compliance costs – a real risk of pushing small-ticket sellers back toward cash or COD,” said Salman Waris, founder and managing partner at law firm TechLegis.

Protecting small merchants and low-value transactions through thresholds or carve-outs could limit the impact on digital commerce, while allowing charges on larger merchant transactions.

Report written by Aryaman Gupta 

Source: Money Control 

The government has not yet specified the MDR rate, transaction threshold or merchant categories covered. Those details will determine whether the levy remains a marginal payment cost or becomes a meaningful new expense for consumer internet businesses.