Centre's No MDR Policy Hampers Fintech Firms' UPI Monetization Plan

Key Highlights

• Finance Ministry reaffirms no plans to levy MDR on UPI, dashing fintech revenue hopes.
• Payment firms' stocks including Paytm and Mobikwik tumble up to 10% following MDR clarification.

The Ministry of Finance's clarification that there were no plans to reintroduce the merchant discount rate (MDR) on payments made through the Unified Payments Interface has dampened payment firms' monetization plans for the popular payment ecosystem.

Shares of listed payment firms fell Thursday, a day after the ministry stated that rumors about the return of the fee for processing UPI payments were "completely false, baseless, and misleading".

One 97 Communications, which operates the payment platform Paytm, closed 6.8% lower at Rs 895.15 on the BSE. One Mobikwik Systems, which runs the Mobikwik app, closed 2.6% lower at Rs 274.15.

"It will be business as usual, as we have been operating without MDR for several years. But there was hope in the industry that MDR would be reinstated, at least for large-ticket transactions; that is no longer the case," according to the CEO of a major payment processor who spoke on the condition of anonymity.

A senior banker who leads the payments function at a private sector lender noted that once the government had gotten the merchant ecosystem used to free digital payments, reintroducing the system would always be difficult.

Over the last two months, the industry has been abuzz with discussions about the government seriously considering reintroducing MDR, but only for large purchases.

Also Read: SEBI Introduces New Tool to Authenticate UPI Addresses for Payments

"Obviously, we don't know much, and we don't want to predict how the government will react, but we definitely see MDR coming to UPI," Paytm CEO Vijay Shekhar Sharma said during the company's FY25 analyst call. He said it could help firms like Paytm build monetisation opportunities from their core payments business.

According to industry insiders, fintech firms have been encouraging customers to switch to MDR-generating instruments such as mobile wallets, prepaid payment instruments (PPIs), and credit cards.

"The RBI has already initiated the MDR on PPI-UPI, which is currently being discussed in the payments ecosystem by multiple industry players and is expected to go live soon. From our perspective, it will undoubtedly provide a new source of revenue, which we do not currently have," Mobikwik cofounder Bipin Preet Singh stated during the FY25 analyst call.

While listed firms discussed projected revenue opportunities, the ministry's clarification on MDR may have an impact on fintech IPOs planned for the coming months.

On May 19, it was reported that PhonePe earns 95% of its revenue from digital payments, with UPI payments being a key component of that business. The company is in the process of filing for an IPO in the second half of this year. Pine Labs, a merchant payments company that is set to file draft IPO papers this month, receives a significant portion of its payments via UPI. UPI represents a significant portion of Razorpay's business, which plans to go public by 2026.

"We have seen almost all forms of innovation and new investments cease in the core payments business. There was hope in the industry that some of it would return, but it appears that has also passed," said the founder of another payments company.