Suppliers to street vendors may inflate bills if hit by MDR: ISB study

MUMBAI: Although most UPI transactions fall outside the proposed merchant discount rate (MDR) framework, suppliers to street vendors could face charges on payments exceeding Rs 2,000, prompting many vendors to consider passing on the additional cost to customers or switching to cash, according to a survey by the Indian School of Business (ISB).The study, conducted by ISB's Centre for Analytical Finance (CAF), found that nearly 70% of street vendors make supplier payments exceeding Rs 2,000, bringing these transactions within the proposed MDR threshold. About 10.4% of respondents said suppliers had demanded additional charges for UPI payments in the 10 days before the survey. All respondents said they would switch to cash if suppliers imposed such charges.The survey of 722 street vendors across 14 states and UTs and 64 urban local bodies found that 67% accepted UPI payments, but only 52% were aware of the proposed MDR framework. Adoption was highest in Tier 1 cities at 82%, compared with 66% in Tier 2 and 64% in Tier 3 cities.Awareness of the proposed charges was also higher among Tier 1 vendors at 66%, compared with 55% in Tier 2 and 47% in Tier 3. Among vendors accepting UPI, 64% knew about the proposed charges, against 26% of those who did not use the payment system. However, awareness did not necessarily translate into an understanding of the framework's applicability. Among vendors aware of MDR, 48% in Tier 1, 46% in Tier 2 and 33% in Tier 3 believed the charges would apply to them.The prospect of additional costs could also affect digital payment adoption. Around 53% of Tier 1 vendors and 45% each in Tier 2 and Tier 3 said they would reduce UPI acceptance if MDR were imposed.The survey also found that some vendors might pass on the charges to customers despite regulations prohibiting merchants from adding MDR to customer bills. Around 30% of Tier 1 vendors, 14% in Tier 2 and 19% in Tier 3 said they would do so.The impact was more pronounced among vendors who had already faced supplier surcharges. Of these, 30.8% said they would pass on the additional cost to customers, compared with 16.2% among those who had not faced such charges.CAF cautioned that exemptions for small merchants at the retail level may not shield them from costs arising during wholesale procurement. Supplier surcharges could squeeze vendors' margins, encourage cash transactions and weaken digital payment adoption, transaction transparency and access to formal credit.The centre recommended limited pilot studies before wider implementation, with monitoring of supplier charges, changes in customer pricing and shifts towards cash. It also called for an independent assessment of UPI operating costs to guide decisions on how these should be shared.Announced in Sept 2026, the proposed framework provides for a 0.4% charge on transactions above Rs 2,000 while exempting small merchants receiving up to Rs 1 lakh a month through QR payments. NPCI postponed the planned Oct 15 rollout until after Diwali. A fresh implementation date is yet to be announced.You use AI every day. Now get your AI Quotient. Take the AIQ test.