Assess the impact of charging for digital payments on financial inclusion and formalisation of small businesses in India.

Since January 2020, UPI and RuPay debit payments have carried a zero Merchant Discount Rate (MDR) under Section 10A of the Payment and Settlement Systems Act, 2007 [3]. From 15 October 2026, a 0.4% MDR applies to Person-to-Merchant (P2M) UPI payments above ₹2,000 [1]. Because the charge is narrowly targeted, its impact on small businesses is likely to be limited, though it carries some risks.

Impact on financial inclusion

• Payers untouched: P2P transfers stay free and customers pay no MDR [2].
• Small merchants shielded: vendors who receive up to ₹1 lakh a month through UPI QR keep zero MDR, and so do rural and semi-urban P2PM merchants [1]. About 96% of merchant transactions stay free [2].
• Better-funded system: MDR goes to banks and payment apps, not to the government [2]. It funds the fraud control and uptime that new users rely on.
• Pass-through risk: merchants above the exemption may add the cost to prices or nudge customers towards cash. This could put off first-time digital users.
• Cliff at ₹2,000: under the 2024-25 scheme, small merchants earned a 0.15% incentive on payments up to ₹2,000 [3]. Crossing that line now means paying 0.4%.

Impact on formalisation

• Burden falls on the formal end: larger sellers pay the charge. The low-value segment that the ₹1,500-crore scheme aimed to bring online in tier 3–6 towns stays free [4].
• Protects digital trails: steady revenue keeps UPI reliable as digital public infrastructure. That preserves the records that make cash-flow-based lending possible and widen the tax base.
• Bill-splitting and switching back to cash for large purchases would thin these records. Credit histories and tax compliance would both weaken.
• Threshold gaming: growing traders may stay "small on paper" to remain under the ₹1 lakh exemption.

On balance, the targeted MDR places a modest cost on formal merchants while keeping UPI free for most users and small traders. To keep it from hurting inclusion, NPCI and RBI should publish data on how many payments cluster just below ₹2,000. They should also revisit the tiered, amount-band charges proposed in RBI's 2022 discussion paper [5] and keep Budget incentives for small merchants. Combining user charges with subsidy can make UPI sustainable while advancing SDG 8.10 on universal access to financial services.