Fee behind every card swipe now comes to UPI: From 1950s dinner bills to QR codes, how the charge began, how it works

From October 15, merchants pay 0.4% on UPI payments above ₹2,000, capped at ₹300. Customers are not charged. Here is how the fee works and where it came from.

Shops and businesses in India will pay a fee of 0.4% of the payment, capped at ₹300, on UPI payments above ₹2,000 from October 15. The change ends more than six years in which the country's most widely used payment system cost merchants nothing.

Customers are not meant to pay this fee, the finance ministry said in a statement on September 15, although in practice, that would depend on whether the merchant decides to pass on the additional cost or absorb it. Transfers between individuals stay free whatever the amount. The ministry said such direct transfers — peer-to-peer — make up 37% of UPI transactions by number and 70% by value.

Several other categories are also exempt, including for small shops and recurring auto-payments. Payments above ₹2,000 to railways, telecom companies, insurers, fuel stations, utilities, educational institutions and sellers of farm inputs will carry a flat fee of ₹5. Payments to mutual funds and stockbrokers will carry 0.02%, capped at ₹300.

The charge is known as the merchant discount rate, or MDR. It is the share of each sale that a merchant gives up in return for accepting a digital payment. Such charges have existed for other methods, such as credit and debit cards. The logic behind the charge is that a payment system is made up of many stakeholders – both sender and receiver banks, the underlying network (National Payments Corporation of India for UPI; Visa, Mastercard and Rupay for card payments), app makers.

Each carry out a function and have resources that cost money – the MDR fee is meant to meet those costs.

All MDR work in the same way. The merchant pays the fee to its own bank, NPCI said in answers to frequently asked questions released on Tuesday. The Reserve Bank of India (RBI) described the fee in a 2022 discussion paper as a discount on the transaction amount, usually recovered when the payment is settled. In practice, that means the merchant's bank typically deducts the fee from the payment and credits the shop with the rest.

From October 15, that means a ₹10,000 UPI payment a merchant receives will reach as ₹9,960 in their account. On a ₹1 lakh payment, 0.4% would come to ₹400, but the ₹300 applies, according to the National Payments Corporation of India (NPCI).

The finance ministry has said neither the government nor NPCI will keep any part of the UPI fee. Banks and payment apps will share it. The UPI and Services Steering Committee, which NPCI heads, will decide how the money is divided. NPCI said the money would pay for a more resilient system, new features, cybersecurity and customer service.

Banks were taking a cut for moving money long before payment cards existed.

In the US, for instance, some banks charged a fee to settle cheques sent to them by mail and paid out less than the cheque’s face value, according to the Federal Reserve's official history. The practice was known as non-par banking. The Federal Reserve Bank of Minneapolis gives an example of a $25 cheque credited as $24.90 after a 10-cent charge.

Carter Glass, the American congressman who co-sponsored the Federal Reserve Act, called such charges “tollgates upon the highways of commerce”. The Minneapolis Fed says the practice troubled the US central bank from 1913 until the early 1970s.

One of the earliest card fees came from Diners Club, a US charge card founded in 1950. At the end of each month, the company billed its members, paid the restaurants and kept a processing fee of 5% to 7%, according to the Smithsonian's National Museum of American History.

In 1958, Bank of America launched BankAmericard in California. The card business was spun off in 1970 and renamed Visa in 1976, according to the Fed's history. In card networks of this kind, part of the shop’s fee goes to the bank that issued the customer's card, the RBI explained in its 2022 paper.