UPI MDR adds to retailers’ margin pressure this festive season

The reintroduction of merchant charges on high-value UPI payments is adding to retailers’ costs ahead of the festival season, with trade bodies warning of margin pressure and a possible shift in consumer payment behaviour.

The National Payments Corporation of India (NPCI) has introduced a 0.4% Merchant Discount Rate (MDR) on person-to-merchant UPI transactions above ₹2,000 from 15 October. The charge will be capped at ₹300 for transactions of ₹75,000 and above. Consumers will not be charged, but MDR will be borne by merchants.

For retailers, the new cost comes at a time when margins are already under pressure.

“Most retailers earn about 3% of the turnover as their net profit, if they are lucky. If this takes away 0.4%, it means about one-sixth of their profit has been lost because of this,” said Kumar Rajagopalan, chief executive officer of Retailers Association of India (RAI).

Despite the cost pressures, broad consumer demand is expected to hold steady through the holiday season. Larger retail chains plan to absorb the cost of maintaining customer convenience, though industry insiders note that shoppers should expect fewer promotional discounts as stores work to protect their bottom lines.

RAI’s Rajagopalan said retailers were entering the festival season amid higher input costs and margin pressure. “From a timing perspective also, this is very bad timing,” he said.

RAI has warned that the charge could create an incentive for small retailers to prefer cash over UPI. The industry body has also argued that putting a cost on digital payments runs counter to the government’s broader push towards digitisation and formalisation.

Apparel sees limited impact

Market participants said that the impact is unlikely to be uniform across the apparel retail sector.

Rahul Mehta, chief mentor, Clothing Manufacturers Association of India (CMAI), told Mint that most of the association’s members are manufacturers and brands rather than small retailers and therefore would not be significantly affected.

He said that the additional cost would put pressure on smaller apparel retailers operating with tight margins, particularly when applied across high transaction volumes during the festival shopping period.

Mehta said the issue was not simply about comparing UPI MDR with card-payment charges. Card acceptance costs are already established in retail, while UPI has grown as a low-friction, low-cost payment mechanism, he said.

Still, Mehta does not expect retailers to actively push consumers back towards cash.

“UPI has become an integral part of modern retail and offers significant convenience to both consumers and merchants,” he said.

The impact could instead show up in procedural changes at stores. “They’ll start charging separate products, you know. So maybe if you’re buying four items, they’ll charge four different bills,” Mehta said.

Mehta expects apparel demand during the festival season to remain stable and does not foresee the MDR causing a ‘massive disruption’.

The new charge comes alongside tighter discounting in apparel retail. Mehta said discounting is likely to be lower this festival season because margins have been squeezed.

“Most are willing to reduce the number of discounts,” he said.

CMAI has not yet decided on an organised response to the MDR. Mehta said it was too early to consider an industry response. “If there is some more pressure from our members, then we will certainly do that,” he said.