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By:

Pushkar Deshpande

12 November 2024 at 8:38:44 am

The Great UPI Shake-up

The new MDR framework seeks to reshape costs and incentives across India’s digital payments ecosystem. Well, enough has been deliberated upon and written on both sides of the coin about the MDR on UPI. There is no point in debating the merits of the move, because the larger economic machinery in the Raisina Hills has a definite view of why the UPI ecosystem should start generating income “just after” completing its 10 years. The timing of the move is even more audaciously peculiar, despite...

The Great UPI Shake-up

The new MDR framework seeks to reshape costs and incentives across India’s digital payments ecosystem. Well, enough has been deliberated upon and written on both sides of the coin about the MDR on UPI. There is no point in debating the merits of the move, because the larger economic machinery in the Raisina Hills has a definite view of why the UPI ecosystem should start generating income “just after” completing its 10 years. The timing of the move is even more audaciously peculiar, despite the recent political resentment. Moreover, with the Supreme Court declining to grant an interim stay, the MDR-on-UPI move has, for now, continued to gather momentum, seemingly with a more resounding institutional consensus, albeit with a deferment until “immediately post Diwali”. Therefore, and more importantly, looking forward, it is rather more interesting to anticipate how market forces are going to adjust to the new realities and find an equilibrium. I strongly feel that the equilibrium will eventually be reached through a series of behavioural changes exhibited by each of the stakeholders in the UPI ecosystem. The central question is not merely whether MDR will generate revenue, but how the costs and benefits of the new arrangement will be distributed across the payment chain. A framework that creates a revenue stream for some participants may alter the incentives of others, encouraging them to change their payment practices, commercial relationships or pricing strategies. The eventual outcome will depend on how each participant responds to it. Merchant Behaviour Let us start with the least common denominator: the merchants. What are the ways in which merchant behaviour, whether among person-to-merchant (P2M) or even person-to-person merchant (P2PM) transactions, will drift and shift in an attempt to reduce or obviate MDR costs altogether? Needless to say, transaction sizes may now gravitate towards the Rs. 2,000 mark more often than not. Splitting transactions conspicuously into multiples of Rs. 2,000 could become an obvious choice, notwithstanding the legitimacy of such practices in the eyes of banks. Whether this response becomes widespread will depend on the actual applicability of the threshold, customer convenience, operational considerations and the scrutiny that such patterns may attract. But the most important behavioural shift would be merchants moving away from P2M and back into P2P. The Government, the NPCI and the leadership of all major UPI payment service provider (PSP) apps are quite emphatic about P2P UPI continuing to be free. What is stopping merchants from replacing their P2M QR codes altogether with P2P ones and getting rid of MDR altogether? If I am a smart merchant, I will maximise the daily UPI acceptance limits by displaying QR codes belonging to as many of my family members as possible at my place of business, moving away from the P2M game altogether. Differential Pricing Another obvious trend would be differential mark-up pricing by merchants for accepting UPI payments, or the additional 0.40 percent cost being incorporated into mark-up prices across the board, without much fuss. Whether merchants can pursue such strategies will depend on competitive pressures, the nature of their businesses and the extent to which customers can switch to alternatives. The next link in the chain of command is the merchant-acquiring bank and the payment aggregator (PA). PAs have long offered merchants different services apart from aggregating funds for them. There are preset service fees, convenience fees and commission-based software-as-a-service (SaaS) arrangements, all agreed upon between PAs and merchants even when there was zero MDR on UPI. Therefore, this MDR, even with a cap of Rs. 300, opens a new revenue stream for PAs, which is most likely to be independent of the aforementioned preset fees. For PAs and acquiring banks, the introduction of MDR is a question of how much of the newly created revenue pool they can retain, how much they must share with other participants, and whether the additional revenue adequately compensates for the technological and regulatory costs of acquiring and servicing merchants. The announced revenue-sharing structure allocates 40 percent of MDR to the issuer bank, 30 percent to the merchant acquirer, 20 percent to the UPI app and 10 percent to the app’s bank partner. This is significant because the entity closest to the merchant is not necessarily the entity that captures the largest share of the economics. The acquirer receives a meaningful share, but it must still make the business case work after accounting for merchant onboarding, reconciliation, settlement support, dispute management, fraud monitoring and other operating costs. For a PA, the obvious strategic response would be to increase its share of eligible merchant transactions. But that is easier said than done. MDR is payable only on eligible transactions, and the merchant’s choice of payment method, acceptance channel and acquiring relationship will determine where those transactions flow. The underlying question is whether MDR creates a sustainable margin pool or simply redistributes a previously subsidised cost across participants. The new arrangement may improve the commercial attractiveness of merchant payments, but its durability will depend on whether the additional revenue can support the infrastructure and services on which digital acceptance relies. Ultimately, the merchant’s response will be central to the outcome. If merchants find the new cost manageable and continue to favour UPI for its convenience and reconciliation benefits, the ecosystem may adjust without a fundamental disruption. If they find ways to avoid eligible transactions, renegotiate their arrangements or redirect customers towards other payment methods, the anticipated revenue pool could look very different from the one suggested by the initial allocation. The buck, therefore, does not necessarily stop with the merchant who pays the charge. It travels through an interconnected system in which every participant has both a commercial interest and the ability to influence how the transaction is routed, classified and ultimately paid for. The Battle for the Digital Rupee UPI apps have spent years competing for customers, engagement, transaction volumes and merchant acceptance. For much of that period, the ability to monetise ordinary UPI transactions was limited. The new MDR framework changes the economics for eligible merchant payments, but it does not mean that every additional transaction will produce revenue for every app. The distinction between P2P and P2M becomes commercially important here. If a merchant shifts a genuine commercial payment from a merchant-coded transaction to a personal UPI transfer, the payment app may still process the transaction, but the economics of the payment ecosystem change. The merchant may avoid the applicable merchant-side charge, while the participants entitled to a share of MDR lose the corresponding revenue. However, there is a regulatory and operational catch. A personal QR code does not transform a commercial sale into a genuine person-to-person transfer simply because the merchant chooses to display it. The classification of the transaction, the merchant’s status and the applicable NPCI framework matter. The ecosystem cannot sustainably depend on a distinction that participants have an incentive to misrepresent. This creates an interesting enforcement problem. If genuine commercial activity migrates into P2P rails, identifying that migration will require more than checking the name printed on a QR code. Transaction patterns, merchant-level receipts, account behaviour and other relevant indicators may become increasingly important, subject to applicable data protection and monitoring requirements. For PSP apps, the strategic response is therefore likely to extend beyond customer acquisition. They will need to balance merchant acceptance, transaction classification, compliance controls and the quality of their relationships with issuer banks and acquiring partners. Issuer banks deserve particular attention because they receive 40 percent of the announced MDR pool. For banks, this creates a direct economic incentive to support the sustainability of UPI infrastructure. Yet it also introduces a tension. The bank issuing the payer’s account may receive a share of MDR even though it does not necessarily own the merchant relationship or control the acquiring experience. Banks will consequently have to consider the quality and cost of their UPI infrastructure, fraud losses, customer support, transaction monitoring and the operational demands associated with increased digital payment activity. The acquiring bank, meanwhile, must compete for merchants while managing onboarding, settlement, disputes and risk. Its 30 percent share cannot be evaluated independently of these responsibilities. This is where the distinction between gross revenue and net economics becomes important. A percentage allocation may appear attractive on paper, but the real commercial outcome depends on the cost of delivering the service, the mix of eligible transactions, the merchant base and the incidence of fraud and disputes. The banks that emerge better positioned may not necessarily be those with the largest customer bases. They may be those that can combine scale with efficient operations, disciplined risk management and strong acquiring relationships. The revenue-sharing arrangement thus creates different incentives for the issuer bank and the acquiring bank. While the former receives a substantial share without necessarily controlling the merchant-facing relationship, the latter must invest in the infrastructure and services that make merchant acceptance possible. Both have a stake in the sustainability of the ecosystem, but their costs, responsibilities and commercial opportunities are not identical. The same distinction applies to payment aggregators and UPI apps. Each participant may benefit from the new revenue stream, but the final economic gain will depend on its position in the transaction chain, the services it provides and the expenses it must bear. A larger share of MDR does not automatically translate into a larger profit. The critical question is whether the additional income encourages investment in better digital payment infrastructure or merely compensates participants for costs they were previously absorbing. If it strengthens merchant services, improves reliability and supports more efficient operations, the new arrangement could help sustain the ecosystem. If the revenue is offset by higher costs or behavioural changes that reduce eligible transaction volumes, the outcome may be considerably less rewarding. The Consumer’s Dilemma Officially, MDR is a merchant-side charge, and banks have been advised to ensure that merchants do not pass it on to customers. The framework also prohibits UPI application providers from imposing platform fees or hidden charges. Nevertheless, economic incidence and legal incidence are not always identical. Legal incidence identifies the party required to pay the charge. Economic incidence describes who ultimately bears the cost after businesses adjust their prices, margins, product offerings and behaviour. A merchant may absorb the charge and accept a marginal reduction in profit. Another may attempt to renegotiate supplier terms, reduce discounts, revise prices across its product portfolio or encourage customers to use a different payment method. Explicitly adding a UPI surcharge would raise a different compliance question from a general price revision applied across payment methods. The more consequential risk is a gradual change in the commercial attractiveness of digital acceptance, particularly for merchants operating on thin margins. If the cost of accepting digital payments rises while cash remains comparatively inexpensive, some merchants may become more selective about which payments they encourage customers to make digitally. Others may absorb the expense because the benefits of digital collections, reduced cash handling and easier reconciliation outweigh the cost. The result will not be uniform across the merchant population. The consumer, therefore, may not always encounter the cost as a separate line item. It could instead appear indirectly through changes in prices, discounts or the range of payment methods that merchants prefer to accept. Whether this happens, and to what extent, will depend on the economics of individual businesses and their ability to compete. The distinction matters because the success of UPI rests not only on the financial incentives of banks, apps and payment aggregators, but also on the willingness of merchants and consumers to continue using it. A payment method that is convenient, widely accepted and economical has a strong competitive advantage. Any change that alters that balance will invite a response. The eventual equilibrium will emerge from the interaction of five forces. Some merchants may encourage smaller, separate payments. However, the economics of doing so will depend on customer convenience, operational costs, the actual applicability of the threshold and the risk of scrutiny. Some commercial activity may be presented through personal payment rails. Whether this becomes material will depend on merchant incentives, classification controls and the effectiveness of monitoring. The distinction between P2P and P2M will consequently become more important to the functioning of the framework. Merchants will evaluate whether to absorb the cost, revise general pricing, negotiate with acquirers or promote alternative payment instruments. Competitive pressure will constrain the choices available to them. Businesses with greater margins may be better placed to absorb the expense, while those operating on thin margins may be more inclined to reconsider their payment arrangements. Merchants may prefer providers capable of combining acceptance, reconciliation, fraud prevention, settlement support and software services. This could favour providers that compete on total value rather than on the MDR share alone. A payment aggregator that helps a merchant manage collections efficiently may be able to retain that relationship even when the merchant becomes more sensitive to transaction costs. The framework is expected to be reviewed periodically. Actual merchant behaviour, digital payment growth, fraud trends, the economics of acquiring and the impact on smaller businesses will be important considerations in evaluating whether the policy achieves its stated objectives. The experience of the market will ultimately be more instructive than assumptions about how participants are likely to behave. The direction of travel will become clearer only “immediately after Diwali”, as announced by NPCI, when the framework takes effect and the market produces evidence. A merchant’s decision to split a transaction or change its acceptance channel affects the revenue earned by payment intermediaries. Changes in those revenues influence the commercial attractiveness of merchant acquisition. Banks and apps, in turn, will have to determine whether the returns justify the cost of maintaining the infrastructure and services that support digital payments. Regulatory monitoring will also have to respond to actual behaviour rather than presumed outcomes. If merchants and other participants find it commercially advantageous to alter transaction patterns, the effectiveness of the framework will depend partly on whether its rules can distinguish legitimate business decisions from attempts to circumvent the intended classification of payments. The new MDR framework creates revenue for banks, merchant acquirers, UPI apps and their partners, while merchants bear the immediate cost. Consumers may also pay indirectly through higher prices or fewer discounts. Its success will depend on merchant behaviour. If merchants continue accepting UPI, the framework could support a sustainable model. If they shift to cash, cards or alternative payment methods, it could weaken the network it seeks to monetise. The market will determine the final balance. A charge introduced at one point in the transaction chain can influence decisions elsewhere, from the size and classification of a payment to the pricing of goods and the choice of acceptance channel. The question posed by MDR is larger than who pays the fee. It is about who captures the value created by UPI, who bears the cost of sustaining it, and whether the interests of the different participants can be reconciled without undermining the very system they depend on. (The writer heads the compliance and risk management functions at one of the top payment aggregators authorised by RBI. He has led risk management divisions of banks and private institutions. Views personal.)

India waits to lasso diamantaire Mehul Choksi

Apr 14, 2025
5 min read

Mumbai: India rubbed its hands gleefully as the Belgium Police honoured its request to arrest the absconder diamantaire Mehul Chinubhai Choksi – more than seven years after he, along with his nephew Nirav Deepak Modi - allegedly duped the Punjab National Bank of nearly Rs. 13,800-crores.

 

The scam involving the ‘Mehul Mama-Nirav Bhanja’ erupted in Jan 2018, after the PNB lodged a complaint with the Central Bureau of Investigation (CBI).

 

By then the kin, along with many of their family members, winked and slipped out of the country, leaving a rattled India rubbing its palms in disappointment.

 

A political-cum-financial storm raged, embarrassing the Bharatiya Janata Party government of Prime Minister Narendra Modi a year before the Lok Sabha elections.

 

Multiple agencies launched a multi-pronged probe into what became the biggest banking scam in the past quarter century – and almost four times bigger than the stock market-cum-banking fraud the late Big Bull Harshad Mehta had inflicted on the Indian economy 33 years ago (in April 1992) – when it was just opening up.

 

In Belgium

According to official reports, Choksi was living with his Belgium citizen-wife Preeti in Antwerp, a global diamond hub, presumably for the past 18 months on a ‘residency permit’ acquired through questionable means, for medical reasons.

 

Earlier, he shot to the headers (June 2021) while being taken in a wheelchair to a court by the Dominican Republic's Police on charges of sneaking into the small country in the Caribbean Sea, North America.

 

Interestingly, as the Antigua & Barbuda government initiated the process to cancel his citizenship acquired through an investor visa, Choksi had suddenly gone ‘missing’ till he surfaced in the Dominican Republic.

 

The April 2025 action by Belgium followed a request by India’s CBI and the financial frauds specialist Enforcement Directorate (ED) to nab Choksi as the InterPol had revoked his Red Corner Notice in 2023.

 

Mama and Bhanja

‘Mama’ Choksi is the founder-owner of Gitanjali Group while ‘bhanja’ Nirav’s Firestar plus other companies – and the duo, with some PNB officials hand-in-glove – conspired to make a ‘mamu’ of not only PNB, but other banks, as it subsequently tumbled out.

 

After making a quiet exit, Choksi was detected living in the verdant Antigua & Barbuda Isles (West Indies), then attempted entry to the Dominican Republic, was sent back to Antigua & Barbuda and then went to Belgium where he was nabbed on Sunday.

 

Similarly, Modi was found sauntering on the streets of London and nabbed in March 2019. He remains in jail there since India's extradition is still pending.

 

However, India is keeping its fingers crossed that it may finally lay hands on Choksi, bring him to India and face trial in the PNB scam, though it may take time.

 

Born in Mumbai (1959) and educated in Gujarat, Choksi, 66, and wife Preeti have three children.

 

The Rs. 13,800-crore PNB scam

In the modus operandi revealed after India’s second-largest PSU bank PNB admitted it was scammed, Choksi and Modi used fraudulent Letters of Undertaking (LoU) to get overseas credits or loans from Indian banks.

 

The PNB first informed the Reserve Bank of India (RBI) of the fraud and then lodged a criminal complaint with the CBI in Jan. 2018, plus another CBI complaint in Feb, that led to a FIR against Modi and Choksi and their companies.

 

The ED entered the scene to probe the allegations of money-laundering through the LoUs – which they allegedly misused to avail short-term business finances from foreign branches of Indian banks.

 

The probe said that the duo were availing the LoUs from the PNB’s Brady House Branch from March 2011, and over the next six-seven years, managed to get a whopping 1,200-plus LoUs like a breeze with the help of some friendly bankers within.

 

Post-scam, the gold-diamond companies Gitanjali Group and Firestone Group with multiple operations in India and abroad have largely wound up, while some personal assets of the mama-bhanja have been auctioned to recover a part of the dues.

 

ED's plea to declare Choksi fugitive stuck for seven years

Even as absconding diamantaire Mehul Choksi, a key accused in the Punjab National Bank loan fraud case, has been arrested in Belgium, the ED's plea to declare him a fugitive economic offender has been pending before a court in Mumbai for nearly seven years.


Choksi, 65, and his nephew diamantaire Nirav Modi are the prime accused in the Rs 13,000 crore PNB bank loan fraud case. Choksi was arrested in Belgium following an extradition request by Indian probe agencies, official sources said on Monday.


The Enforcement Directorate had filed the application in July 2018, seeking to declare Choksi an FEO and confiscate his assets under provisions of the Fugitive Economic Offenders Act.


However, the matter has witnessed repeated delays owing to a barrage of applications filed by the accused in the PMLA court and the Bombay High Court alleging procedural lapses in the Enforcement Directorate's plea.


"The court is kept busy with frivolous applications, and hearing on our application to declare him (Choksi) an FEO has been adjourned for the past seven years,” an ED officer had said after the hearing was once again deferred this February.


"The court should have continued the hearing and taken a decision on the future course of action once the application was moved," the officer had said.

He had urged the court to take note of the repeated filing of similar applications and to not entertain them.


Choksi's lawyer had informed the court that the accused was undergoing treatment for suspected cancer in Belgium and intended to file an application in connection with his health.


Under the FEO Act, an individual can be declared a Fugitive Economic Offender if a warrant has been issued against him for an offence involving Rs 100 crore or more and he has left India while refusing to return. Once declared an FEO, the person's property can be confiscated by the investigating agency.


Choksi had challenged the ED's application in the Bombay High Court, alleging that the agency "had not followed proper procedure before filing the application and, hence, it stands vitiated".


However, in September 2023, the High Court dismissed his plea, ruling that the ED had adhered to the prescribed format under the FEO Act. It also vacated a stay on the special court's proceedings.


Despite this, the hearing on declaring Choksi FEO could not commence, with Choksi continuing to file applications before the special court through his lawyers.


While most of these pleas have been dismissed, a few remain pending. His latest attempt to stall proceedings through a plea to recall the notice issued on the ED's FEO application was rejected in December 2023.


According to ED officials, Choksi left India under suspicious circumstances in early January 2018.


Shifting stance

Choksi's counsel has argued that the ED kept shifting its stance on the material grounds for declaring him an FEO and that the suspension of his Indian passport made it impossible for him to return for investigation.

The court, however, rejected this argument, stating that the notice was issued based on accurate information and not based on "wrong facts or mistaken assumptions".


ED claimed the accused left the country under suspicious circumstances in the first week of January 2018.


Nirav Modi has already been declared as an FEO by the special court. He has been lodged in jail in London since 2019.

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