Small retailers may dodge UPI fee through bank transfers, workarounds

Small retailers across India may adopt various strategies to avoid the 0.4 per cent merchant discount rate on UPI transactions that came into effect recently, according to trade associations and industry observers.

Retailers are expected to explore multiple options to mitigate the impact of the fee, including directing customers toward bank transfers, splitting larger transactions into smaller ones to stay below fee thresholds, or simply passing the cost on to consumers through marginally higher prices.

The move reflects growing concern among small merchants about the cumulative burden of payment processing costs. Trade bodies have cautioned that the UPI MDR could accelerate a shift toward alternative payment methods, potentially fragmenting India's digital payments ecosystem.

The Reserve Bank of India introduced the merchant discount rate to improve the sustainability of UPI infrastructure. However, industry representatives have argued that the fee structure may disproportionately impact small traders who operate on thin margins and lack the scale to absorb additional costs.

Experts suggest the ultimate impact will depend on consumer behavior and regulatory responses, with some retailers likely to absorb costs while others test the elasticity of customer demand through price adjustments.