As a part of the Union Budget 2023-24, the Central Government has reduced the allocation meant for banks and fintech startups facilitating UPI transactions. Under the Budget, an allocation of Rs. 1500 crore has been proposed to promote digital payments. This is quite different from what industry stakeholders expected in comparison to the outlay in the last year’s budget. Also, the Payment Council of India (PCI) had asked for comprehensive MDR support of Rs. 8,000 crore, setting aside Rs. 6,000 crore for only UPI transactions.
Incidentally, the government had only kept Rs. 200 crore aside for compensation provided to different UPI players as a subsidy.
The current allocation of subsidy will help incentivize small value-transactions and small-scale merchants, which will again be a significant boost toward digitalizing the payment ecosystem across industries in the country.
What was the Budget 2022-23 Outlay for Digital Payments Subsidy?
It was expected that the budgetary allocation toward providing financial support to digital payments would grow more than two-fold to Rs. 2,137 crore in the current financial year. In FY2022, the government spent Rs. 1,044 crore as a subsidy for processing UPI transactions at zero charges. However, the actual allocation remained stagnant at Rs. 1500 crore.
Where do these Allocations Go?
The funds allocated for digital payments subsidy are generally disbursed to fintech companies and banks that promote UPI transactions. Currently, there is no charge (MDR) levied from customers on UPI transactions, and this subsidy is meant to compensate the fintech startups and banks to abide by the restrictions on UPI transaction fees.
Interesting Read: Budget 2023-24: What’s in it for Businesses
More About the MDR Story around UPI
Merchant Discount Rate, also known as MDR, is the fee that payment platforms and banks charge businesses/merchants to process payments and settle them into their bank accounts. In other words, if a platform charges 2% MDR to process payments through all payment options and a customer pays Rs. 1,000 to a merchant, the merchant will receive Rs. 980 (1,000 – 20) in his bank account. This MDR is shared among banks and payment service providers later.
Particularly in terms of UPI payment method, there is no MDR levied. This is where the banks and payment startups are rewarded with the digital payment subsidy (as mentioned above). Zero MDR can also be considered the reason behind the exponential growth of UPI as a widely accepted payment method across the country.
Interesting Read: MDR, PSP Fee, Interchange Fee, and Other Payments Charges – Explained
Where has UPI Reached now in Terms of Volume and Worth?
UPI has grown as a payment method by leaps and bounds in the last couple of years. Compared to the volume of UPI transactions that stood at 4.46 million in Jan 2017, they have now reached an unprecedented mark of 7,829.49 million in Dec 2022, corresponding to a value of Rs. 12,82,055 crores (NPCI data).
From a business perspective, this means greater emphasis on accepting payments digitally irrespective of the scale at which they operate. From small tuck shops at every street corner in India to bigger enterprises dealing with both consumers and businesses, democratization of digital payments holds mutual benefits for both buyers and sellers.
