The Union Cabinet on Wednesday approved an incentive scheme worth approximately ₹1,500 crore to promote UPI person-to-merchant (P2M) transactions below ₹2,000.

Under the scheme, no Merchant Discount Rate (MDR) -— the fee charged by payment processing companies to merchant companies — will be applicable on UPI transactions below ₹2000. To further encourage the adoption of digital transactions, small merchants will receive a 0.15 per cent incentive per transaction for UPI payments under ₹2,000.

The government further said that 80 per cent of the admitted claim amount for incentives will be disbursed to banks every quarter without any conditions, for faster reimbursement. The remaining 20 per cent is subject to the bank maintaining high service standards.

“This will enable small merchants to avail of UPI services at no additional cost. As small merchants are price-sensitive, incentives would encourage them to accept UPI payment,” a statement from the government said.

“Common citizens will benefit from seamless payment facilities with no additional charges,” the statement said.

Since January 2020, to promote digital transactions, MDR was made zero for RuPay debit cards and BHIM-UPI transactions through requisite amendments in the Payments and Settlement Systems Act, 2007 and Income-tax Act, 1961.

“One of the key challenges in promoting digital payments, particularly in tier-3 locations and beyond, is the high cost of setting up the necessary payment infrastructure,” said Ramakrishnan Ramamurthy, chief delivery and operations officer – India, Worldline.