In a bid to keep the UPI ecosystem affordable and accessible for all users, the government recently launched an incentive scheme for the “promotion of low-value BHIM-UPI transactions Person to Merchant (P2M)”. Under this, person-to-merchant (P2M) UPI transactions, which are valued at less than Rs 2,000 and are made to small merchants, the acquiring bank and other involved stakeholders will be eligible for anincentive at the rate of 0.15% per transaction value.
According to the circular, “the scheme, which has an outlay of around Rs 1,500 crore for 2024-25, will have the government pay incentive to the acquiring bank (Merchant’s bank) and thereafter shared among other stakeholders, namely issuer bank (Customer’s Bank), Payment Service Provider Bank (facilitates onboarding of customers on UPI apps and API integrations), and App Providers (TPAPs).
As per NPCI (National Payments Corporation of India), P2PM merchants, or small merchants, are those who have a projected inward UPI transaction value of less than or equal to Rs 50,000 per month.
Notably, MDR is a fee charged by banks and other payment processing gateways from merchants in lieu of facilitating their transactions. This is generally charged as a percentage of the transaction amount.
“As per RBI, MDR up to 0.90% of transaction value is applicable across all card networks. (for debit cards). As per NPCI, MDR up to 0.30% of the transaction value is applicable for UPI P2M transactions. Since January 2020, to promote digital transactions, MDR was made zero for RuPay Debit Cards and BHIM-UPI transactions through amendments in Section 10A of the Payments and Settlement Systems Act, 2007 and Section 269SU of the Income-tax Act, 1961,” the circular added.
How will this benefit the common man?
Whenever there is significant MDR on payment transactions such as credit cards, many merchants typically pass on this charge to consumers by charging them extra. However, this new incentive scheme will encourage banks, PSPs (payment service providers), and TPAPs (third-party service providers) to not charge MDR, especially for small-ticket UPI transactions.Now, since the merchants will not be charged MDR by the acquiring bank, this cost will not ultimately trickle down to the end user, i.e., you. This means that you can continue to make low-value payments (i.e., less than Rs 2,000) without having to bother about MDR. As Rahul Jain, CFO, NTT DATA Payment Services India, highlights, this is a welcome step for keeping MDR at bay, particularly for small-value transactions. “In essence, the government is giving an incentive to banks and PSPs so that they do not charge the small merchants for processing transactions.”
Moreover, this might potentially bring more small merchants, particularly those in the unorganised sector, into the ambit of UPI. Shams Tabrej, CEO at Ezeepay, says, “Most small businesses are reluctant to accept online payments because they fear the cost of transactions or technical intricacies. But with this program, they are not only being nudged to incorporate UPI in their day-to-day operations but also incentivized to do so.”
Also, about 20% of the incentive amount depends entirely on whether a bank maintains high system uptime and a low technical decline percentage. This will ensure people have access to efficient, 24×7 UPI transactions.
“For consumers, the plan allows for smooth, cashless dealings for everyday transactions, reducing their reliance on cash and enabling prompt, secure payments. As UPI becomes the mode of transaction of preference for low-value transactions, it ensures greater financial inclusion and digital literacy, mainstreaming digital payment rather than being an exception,” says Tabrej.
How will small and large merchants benefit from this?
As the circular notes, “for all the quarters of the scheme, 80% of the admitted claim amount by the acquiring banks will be disbursed without any conditions.
This means that 80% of all the claims made under this scheme by stakeholders will be honoured unconditionally. The remaining 20% will only be disbursed subject to certain conditions:
a) 10% of the admitted claim will be provided only when the technical decline of the acquiring bank will be less than 0.75%;
b) The remaining 10% of the admitted claim will be provided only when the system uptime of the acquiring bank is greater than 99.5%.
For large merchants, no notable incentives have been introduced. Similarly, for transactions valued over Rs 2,000, no incentives have been offered, even for small merchants.
Previously, as per an NPCI circular dated December 23, 2021, the incentive rate per transaction by the government to the acquirer bank for industry programs was set at 0.15%. Notably, industry programs include insurance, mutual funds, government, education, railways, agriculture, debt collections, fuel, petroleum products, POI funding transactions, telecommunication, utility payments, business/personal services, and hospitals. For all other non-industry programs, the incentive rate per transaction by the government to the acquirer bank was set at 0.15%.
Now, the government has done away with the 0.25% category, bringing all programs under a single window for the purpose of this scheme.
Says Rohit Mahajan, Managing Partner and Founder of Plutos ONE, “This program will further drive small merchants’ use of digital mediums for transactions since UPI recorded over 14 billion transactions in February 2025 alone. In addition to increasing merchant adoption, offering a 0.15% incentive for UPI (P2M) transactions up to Rs 2,000 will solidify India’s standing as a global leader in digital payments.”
