Said that the government's moves on removing what was at one time thought to be free UPI is a regressive move that it is being taken under pressure and so and so forth. Now the politics sits on one side, viewers as you know, but let's talk substance. And let's talk with the PhonePe CEO, Mr. Nigam. He is here with us. Thank you so much for taking the time out. Let me ask a very basic question, sir. UPI became successful precisely because it was free. Does putting an MDR on transactions above 2000 now risk weakening the biggest advantage UPI has over cards because many people are seeing this as beneficial to Visa, Mastercard, you know, that whole other ecosystem?
Thanks for having me on your show, Rahul. Let me break my response into two parts. You open by saying UPI was successful precisely because of zero MDR. The fact of the matter is UPI had an MDR of 0.65% from 2016 till 2020, just like debit cards in India. And I hope you remember UPI's first major accelerator was actually during demonetization. That's when cash disappeared and all the UPI apps suddenly were available for peer-to-peer transfers. The single most popular use case in UPI for the last 10 years is actually peer-to-peer money transfer, which was, is, and will continue to be completely exempted from any kind of MDR to begin with. There is no merchants in play. The second was by 2020 when zero MDR came in, all of the large, what we call enterprise shops, the malls, the big stores, all the premium outlets, all had POS devices accepting both credit cards, digital wallets, and UPI, and they were already paying the MDR. Not just on transactions above 2000, by the way, they were back then paying on transactions below 2000 as well. Same with all the online players, they never asked for nor expected UPI to be free. The reason the government made UPI free, their stated mission was that for the small merchants there was this belief that if UPI is not free, that the small merchants will never become part of the inclusion set. Now that whether as a marketing sort of a plan or in terms of real impact, whichever way, it has been a great success. There is no denying the fact that very small businesses and merchants, and you know, the thelas and kiranas and sabziwalas have all adopted UPI. But I think to that point, right now there is a massive explosion in UPI transaction in the last six years, massive. Over 500 million Indians are using it every year and as media also keeps reporting frequently, UPI is now the world's largest digital payments transaction network. Now we can celebrate that all the time and I am very, very proud of being part of that ecosystem. But fact is 500 million Indians transacting across 20-30 million shops comes with the cost, the significant capex, this investment behind cyber security, risk, fraud, chargebacks, KYC, see the compliance burden on the industry increasing every passing year and now AI-related threats. So at the end of the day the question is about how to make the industry sustainable while still having enough money to also rapidly continue growing. Okay? The dream was never 500 million Indians. The dream is a billion Indians on UPI and that requires more capital. Over the last five years, six years, the industry has invested close to about 5 billion dollars of equity. This is coming on the back of losses after losses on every fintech and bank player on the UPI P&L. That's why we have all been actively lobbying saying we need a sustainable revenue model in line with the rest of the world and by the way even within India in line with the rest of the payment instruments. Even NEFT, RTGS not free, why should UPI be free to merchants? So there are two questions here. Why can't instead of charging MDR, the body that operates this ecosystem make profits? Why can't those profits be reinvested to maintain this architecture which is now of course expanding? One, and two, Visa and Mastercard will be the biggest beneficiary, some people are saying so, that advantage of UPI over cards is being narrowed and many people are attributing other motives to it. And you know, when I go in with this, so could you explain that? So on your first question, I am assuming you are talking about NPCI as the body that runs the network, that's right. I think the entire balance sheet life till date probably about 7,800 crore. On annual basis, I think last year they turned about 1,200-1,300 crore in profit. The government was paying 2,000 crore mag subsidy for FY25, 26, 27. They have in fact not paid up any for FY26, FY27 money is also not been paid out because what the industry highlighted, this is hard data, in FY25 the government actually paid out 3,900 crore, sir, because that was linear to the MDR loss to industry that used to exist. Okay. By FY25 and FY26 that number had crossed 7,800 crore. This year if the government truly wanted to compensate, I am not even talking about making profits, compensate all of the investment of banks and fintechs, that number would be about 10 to 12 to 14,000 crore investment in that range. So neither NPCI life till date profits nor what the government was paying as subsidy can support the scale at which this infrastructure runs. Point number one. Point number two, UPI's spectacular success is precisely because they are actually incredibly innovative in recognizing that India is a phone-first economy. Visa and Mastercard were not able to compete in 2016 through ICICI because they were operating in a card economy where the acceptance network requires expensive POS devices. Just last week at the recent Global Fintech Fest, PhonePe is in fact partnered with Visa as well and we finally launched a tap-on-phone using your phone, what is popularly in the west seen with Amazon Pay and Apple, I mean Google Pay and all these companies. So we don't give UPI enough credit, they were actually just way more innovative. Point number one. Point number two, I see on your ticker scan the QR code and subscribe to our channel. And I am laughing because 10 years ago nobody in India had heard of the word QR code. And we don't give the industry enough credit for having found a very low-cost solution that turned every little thela and bhajiwala into a merchant that accepts digital payments. We should be so proud instead of trying to pillory everybody.
Okay. Let me ask you this. Government says that roughly 96% of transactions will remain unaffected because they fall under the 2,000 rupee threshold. Fair enough. But is transaction volume the right metric? Could be effective 4% accounts and we know the numbers, they form a disproportionately large share of UPI's transaction value. And certain people say that that's really where the economy will start taking a hit because small businesses, people operating on smaller margins, etc., will get hit and they have no choice but to pass this on to the consumer. So let's break this down from the consumer side and then the merchant side. Right, for the customer, NPCI and the government have said merchants can't transfer the cost across. Now I know this debate about whether that will happen or not, but the law is pretty clear and the intent is pretty clear. All P2P was and is and continues to remain free. All P2M or merchant transactions were, aren't, continue to remain free on the consumer side. So consumers' first preference will still be to pay using UPI over cash. It has become a way of life across a very large swath of society. Now let's come to the merchant side. As you correctly said, 96% of the time when a customer walks into the shop there is no MDR getting applied. So it is in the rest of rare, the 4%. Now as part of overall value, yes it is 65%, but even that needs to be contextualized. Petrol is a very big part of the economy. In petrol the MDR is not 0.4%. Very wisely the government and NPCI have explicitly stated 5 rupees is the maximum transaction charge. The average petrol purchase in India between commercial and retail is about 600 rupees. So 5 rupees is nothing of nothing. Point number one. Second, where are big ticket transactions happening where the values are high? Broking, capital market is basically the MDR is 0.2%, not 4%. It is one-twentieth that of e-commerce and retail. Insurance kept at 5 rupees, agri kept at 5 rupees. So some of the biggest spending sectors are actually kept. On the retail side as well, while it is 4%, above 75,000 rupees is no incremental charge because at 70 they have put a cap of 300 rupees on the MDR per transaction, which means if I buy a 1.5 lakh iPhone, effectively I am paying 20 basis points, not 40 basis points. So I think sector by sector NPCI has taken extreme care and caution to make sure no one is feeling the pinch in a way that will become unsustainable or become an irritant that could even possibly drive UPI volumes down. We don't believe it will either as an industry. The reason I get that confidence is that about three years ago NPCI introduced RuPay credit cards, which by the way is the only credit card that runs on the UPI rails itself. It works on every UPI QR code in the country and 98% of our merchants are accepting RuPay credit cards today and the MDR there is almost 2%, sir. So 0.4 is nothing.
Let me ask you this on the broking point. We have had Mr. Kamath of Zerodha come out and say that MDR is reasonable but a 300 maximum charge makes sense for a merchant selling you something. It doesn't make sense when a broker is merely moving your own money in and out of your trading account. How do you respond to that?
On that specific case, I know that even NPCI has taken cognizance of it. Again, MDR is applied in two different ways. It's called industry programs and non-industry programs. Industry programs, like I mentioned, all OMCs with a max 5 rupee charge, recognizes the economics of that category. Bill payments is also kept at 5 rupees on transactions over 20,000 because certain categories don't have the operating margin. A broker receiving money as input, Nitin has a point. If that money is not invested, then he is not earning. Now it's a nuanced problem because SEBI also further introduced the rule saying any uninvested money must be refunded at the end of the month. So you could truly just have money going around and around. I think NPCI is looking at it. If the 0.2% has not solved for it correctly and it's a miss between when money is transferred versus when it's invested and Zerodha earns money, I am sure Nitin would have reached out. He is a resourceful guy, smart guy. I am sure you would have reached out to NPCI. I am sure they are looking at it. And again these irritants will get ironed out. I am confident of that.
Okay. So let me get to another specific issue. What happens to small businesses operating on very thin margins? Even a small MDR can matter when margins are, you know, transaction volumes are high and margins are slim. Let me ask you for some examples where small merchants have transactions that are running above 2,000 rupees and the ratio of 2 plus transactions is so high that the MDR starts mattering.
I honestly, like, I know these are edge cases we are trying to imagine. I can't think of them having been in the industry for 10 years now. And by the way, I used to work at Flipkart for four years before this, largest e-commerce company in the country. So we paid MDR, so I understand the impact on the P&L. But every other instrument out there is more expensive. Cash is more expensive because you have to manage it, you have to deposit it, there is pilferage, wallet charge between 1 to 1.5%. Cards have always cost 2 to 2.5%. Debit cards cost 0.65%. PSU debit cards 0.65%. So this is still the cheapest. I think people are feeling the pinch because anytime you take something that's free and make it even 0.01%, people feel like it's infinitely more, right? That's just life. I mean that is true of anything. So it's unfortunate that people are not comparing the UPI MDR with Visa, V-MDR or any other instrument in the market. We are comparing it to free, which honestly was a point in time sort of subsidy that the government created or policy the government created. But we as an industry, we held it's never going to be sustainable over the long run.
