UPI MDR rollout near? NPCI's new scheme for small merchants signals preparations are underway

The implementation of Merchant Discount Rate (MDR) on select Unified Payments Interface (UPI) transactions could be around the corner, with a fresh circular issued by the National Payments Corporation of India (NPCI) providing another indication that the proposed pricing framework is moving towards implementation.

In a circular dated November 11, as seen by The Head and Tale,  NPCI has introduced the 'UPI Vyapaar Saksham Scheme' to promote UPI acceptance among small merchants. The scheme will be funded through contributions from the MDR collected by acquiring banks, issuer banks and payment service providers (PSPs).  Its three-year tenure will begin from the date of implementation of UPI MDR.

While NPCI has not announced a fresh implementation date for MDR, industry sources believe the rollout could happen shortly. 

November 15 is being discussed as a possible date, according to one source, although The Head and Tale could not independently confirm this.

A banker familiar with the developments said a meeting was expected to take place post Diwali before NPCI gives the go-ahead for implementation. However, that meeting is yet to happen, the banker added.

NPCI had earlier deferred the implementation of MDR on select person-to-merchant (P2M) UPI transactions, which was originally scheduled to take effect from October 15. The Steering Committee had subsequently said the levy would be implemented immediately after Diwali, with the revised date to be notified separately.

The November 11 circular, however, provides a clear indication of the operational framework being put in place alongside the proposed MDR regime.

Under the UPI Vyapaar Saksham Scheme, NPCI plans to use a portion of the MDR collected by participating banks and payment service providers to incentivise the deployment of UPI acceptance infrastructure and drive transaction growth among small merchants.

According to the circular, each issuing bank, acquiring bank and payer PSP participating in the scheme will contribute 5% of its MDR share, excluding MDR attributable to non-eligible categories, to a dedicated fund. 

Contributions will be collected monthly based on the MDR earned in the preceding month.

The scheme will have a three-year duration from the date of implementation of UPI MDR. NPCI will review the scheme every six months and may extend it, if required, to cover additional regions and merchant categories.

The scheme is aimed at small merchants with an annual turnover of up to Rs 40 lakh in the previous financial year. NPCI has classified eligible merchants as either new merchants, onboarded during the scheme period, or existing merchants, onboarded before its commencement.

The geographical focus will be in Tier-3 to Tier-6 cities and towns, the northeastern states, and the Union Territories of Jammu and Kashmir and Ladakh, and other eligible merchants. Tier-1 and Tier-2 centres will also be covered, but only for small merchants operating under notified Central Government schemes.

The scheme has three components, with the largest allocation directed towards transaction growth.

About 30% of the total fund will be to incentivise the onboarding of new small merchants through the deployment of physical QR codes and soundboxes.

Acquiring banks will receive Rs 300 for every eligible physical QR code deployed and Rs 750 for every soundbox device. To qualify, merchants must have at least 25 eligible transactions in any two months of a quarter and a minimum monthly transaction value of Rs 5,000. The merchant should also not have previously received incentives under this or another subsidy scheme for the same infrastructure.

Secondly, 50% of the fund will be to encourage sustained transaction activity among existing and newly onboarded small merchants.

Under this component, acquiring banks will receive an incentive equivalent to 0.03% of the aggregate value of eligible transactions, provided they achieve a minimum quarter-on-quarter transaction volume growth of 5% among eligible merchants. 

Merchants in targeted geographies will qualify for an additional 50% incentive over the base amount.

And, the remaining 20% of the fund will reward incremental transaction growth in targeted geographies. It provides an incentive of 0.20% of the incremental aggregate transaction value, over and above the incentive available under Component B. The incremental transaction value must be positive compared with the previous quarter.

NPCI expects the scheme to facilitate the deployment of 6-10 million new physical QR codes and 0.5-1 million soundbox devices annually. It also aims to drive annual transaction volume growth of 30-50% among existing small merchants.

The circular also lays down detailed reporting, verification and settlement requirements for participating banks.

Acquiring banks will have to submit quarterly details to NPCI, supported by merchant-level information, deployment details and transaction data. NPCI has also prescribed merchant-level reporting requirements, including unique merchant identification, merchant category, location and geocode information. Acquiring banks will have to capture and transmit merchant geocode details through the prescribed API framework.

Claims will need to be certified by the acquiring bank's internal auditor and an external auditor before submission.

NPCI will act as the administrator of the scheme and will be responsible for its governance, validation and settlement. It will process incentive settlements within 30 days of claim submission and validation.

The scheme also includes safeguards against duplicate claims, artificial transaction splitting, fraudulent deployments and incorrect merchant classification. NPCI has reserved the right to recover excess or erroneous incentive payments and disqualify participants in cases of non-compliance.

Don't miss The Head and Tale coverage on UPI MDR: here, here, here, here, here and here.