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For much of its life over the last decade, the United Payments Interface (UPI) operated on an unusual economic premise. Its value increased as more people and businesses used it, yet the transaction (cost) itself remained almost invisible in price.

Consumers paid nothing, merchants were largely insulated from any additional charges, and the government helped sustain the ecosystem through policy support. Another point that merits close attention is how UPI, not just as a platform payment system, but as a mode of payment became its own currency. If one can, let’s say buy Rs 3,000 worth of goods or services by spending cash, one should be able to do so with UPI too. Not pay Rs Rs 5 here or 0.2% there for any reason.

That model was remarkably effective at creating scale. It also meant that a payment system handling hundreds of billions of transactions had no conventional price for its basic service. The absence of a visible price, however, did not mean the service had no economic cost. It meant that the cost was being distributed elsewhere in the system.

The 0.4% Merchant Discount Rate (MDR) on certain merchant transactions over Rs 2,000 does just that. The charge is insignificant on its own. It is important because it brings a price into a network that was partly developed without a price.

The first question is who pays? The more interesting economic question is what happens when a previously unpriced service gets a price after consumers and merchants have developed their behaviour around it. The rule of economics is at play here. The person who is legally charged is not always the person who ends up paying the cost.

While the economic incidence will be determined by market behaviour and relative price elasticities, the National Payments Corporation of India (NPCI) may not allow merchants to pass the MDR separately to the consumers. The MDR would cost Rs 4,000 to a retailer who processes Rs 10 lakh of eligible UPI transactions. It might absorb the cost, change prices in other areas, cut discounts or promote another payment method.

Consumers will thus never have to pay an additional UPI fee, but will still feel the impact of the economic cost in the form of price or loss of discount. This will vary depending on competition and availability of substitutes. If the demand is........

© The Wire