THE HIDDEN CASCADING COST OF DIGITAL PAYMENTS

Abstract

This paper examines whether a small merchant discount rate (MDR), when applied to successive eligible person-to-merchant (P2M) transactions, can create a cumulative cost effect as goods move through a multi-stage supply chain. A deterministic model is developed using an initial manufacturing cost of ₹10,000, five successive 5% cost mark-ups and an assumed MDR of 0.4% at each eligible stage. Under full pass-through, the modelled final value increases from ₹12,762.82 in the zero-MDR counterfactual to ₹13,020.12, a difference of ₹257.31 (approximately 2.02%). Direct MDR across the five stages is ₹234.03; the remaining ₹23.27 is the additional downstream mark-up effect on MDR previously embedded in landed cost. A second sensitivity case removes MDR from the fifth transaction while retaining it on the first four stages. This produces a modelled final value of ₹12,968.25, or ₹205.43 above the zero-MDR counterfactual. However, this second case is only a valid below-₹2,000 policy illustration if the actual fifth-stage payment is independently below ₹2,000. In the same single-product chain model, the fifthstage transaction value is approximately ₹12,968.25 and therefore does not satisfy that threshold. The paper explicitly distinguishes this mathematical sensitivity from a claim about actual eligibility under the announced framework. The study is conceptual rather than empirical. It demonstrates a conditional cost-transmission mechanism and identifies the transaction-level data needed to estimate real-world incidence. It does not claim that MDR inevitably causes retail inflation or that every UPI payment attracts MDR.