India’s decision to allow Merchant Discount Rate (MDR) charges on select Unified Payments Interface (UPI) transactions marks a major shift in the economics of the country’s instant payment network, after years of government support and industry demands for a sustainable revenue model.
The Lok Sabha approved the bill last month that allows banks and other payment service providers to levy charges on transactions made through the country’s instant payment network. The bill sought to remove the legal provision that prevented banks and payment service providers from imposing MDR.
MDR is a small fee paid by merchants to banks and payment service providers when customers make digital payments. Fintech companies have been demanding the introduction of MDR for a long time, arguing that processing UPI payments without any merchant fee has become economically difficult to sustain as transaction volumes have risen sharply.
The Indian government has said it wants to make UPI financially self-sustaining, leading to the decision to allow MDR on specified transactions. Under the new framework, UPI payments to merchants above a specified threshold can attract MDR, while the government has clarified that consumers will not be charged for making UPI payments.
The change comes after the payments industry repeatedly warned that the annual subsidy fixed for UPI had never been sufficient to cover the actual cost of operating the system. The issue has also been discussed by the Parliamentary Standing Committee on Finance. In August, the Finance Ministry told the committee that it was examining the feasibility of restoring MDR for certain high-threshold transactions or merchants, as well as a tiered incentive structure to reduce government support over the next few years.
The Reserve Bank of India has welcomed the introduction of MDR. The central bank said on X that a fair and balanced distribution of MDR among all ecosystem participants would encourage continued investment in technology, infrastructure and payment acceptance networks. According to the RBI, this could help expand UPI acceptance, increase its customer base and support continued growth in transaction volumes.
The RBI had sent mixed signals on MDR last month. At a press conference following the Monetary Policy Committee meeting in the first week of August, RBI Governor Sanjay Malhotra said that someone would ultimately have to bear the cost of running the infrastructure.
At the same time, he stressed that the RBI's focus was on keeping digital payments “accessible, affordable, secure and sustainable”.
The RBI is targeting 1 billion UPI users by 2030, an ambitious increase from the 555 million users connected to the system so far. These figures were shared in Parliament.
Banks and payment companies have for years sought a way to recover the cost of operating and securing the system. In the current Budget, the government allocated Rs 2,000 crore under the incentive scheme that compensates banks for zero-MDR transactions.
The Financial Times reported that, according to some estimates, this amount represents less than 15% of the annual cost of maintaining and upgrading the system, particularly when the substantial investment required to protect it against cyberattacks is taken into account. The government had previously maintained that UPI was a public facility and that banks should also contribute to its cost.
The decision also comes after the United States Trade Representative’s March 2026 report described India’s free digital payments policy as a trade barrier. The report said the policy disadvantaged companies such as Visa and Mastercard because they charge fees on every transaction.
Around 80% of UPI transactions are processed through Google Pay and PhonePe, which is owned by Walmart. The issue has therefore also become part of a wider debate over the economics and structure of India’s rapidly expanding digital payments ecosystem.
The government and the National Payments Corporation of India have said that even after MDR is introduced, UPI remains considerably cheaper than card payments. NPCI said in a statement that MDR on normal credit cards is generally between 1.5% and 2.5%, while debit-card MDR can be as high as 0.90%.
UPI, which was launched nearly a decade ago, has since become the world’s largest real-time payment system by transaction volume.
The fintech industry has welcomed the government’s decision to create a revenue stream for payment companies. Bloomberg reported that these companies played a key role in making UPI popular but had no clear way to earn money from it.
Pine Labs CEO Amrish Rau said in a post on X that the introduction of MDR on UPI would significantly change perceptions of fintech companies. He said the sector had long been viewed as one where businesses had been built without a clear monetisation model, and argued that a sustainable revenue model for UPI could change that perception, improve investor sentiment and provide a major boost to the broader fintech ecosystem.
Critics, however, have argued that MDR effectively amounts to a tax on merchants. Their concern is that businesses could try to pass the cost on to customers through indirect means, potentially affecting the pace of UPI’s expansion.
Ashneer Grover, co-founder and former managing director of BharatPe, said in a post on X that any MDR on UPI would eliminate what he described as the one thing in India that had been operating seamlessly “like clockwork”.
The Indian government’s policies have historically encouraged digital payments. It had eliminated the merchant fee charged on UPI and RuPay debit-card transactions to promote digital payments. Banks and fintech companies were instead supported through funds allocated in the annual Budget.
NPCI has said that industry estimates put the annual cost of operating UPI at around Rs 20,000 crore. This includes expenses related to servers, bandwidth, fraud prevention and technical support provided to banks. A parliamentary committee report in March also said that the absence of MDR was making it difficult to keep UPI financially sustainable.
According to the new framework’s FAQs, NPCI described the annual incentive as “short-term bridge funding” rather than a permanent arrangement. The organisation also said that relying solely on budgetary allocations creates uncertainty around funding and limits long-term technical investment by banks and fintech companies.
The government’s 2026-27 allocation for operating UPI and RuPay is Rs 2,000 crore, according to PTI. The gap between the cost of running a rapidly expanding payments network and the government’s willingness or ability to finance it has been one of the key reasons the payments industry has continued to demand a regulated MDR.
The Payments Council of India has for several years sought permission to impose a controlled MDR on large merchants so that the ecosystem does not remain dependent on government financial support.
Under the framework announced by the government, UPI remains completely free for person-to-person transactions, while merchant transactions up to Rs 2,000 also remain free. Approximately 96% of all person-to-merchant UPI transactions will remain unaffected. MDR will apply only to specified merchant transactions above Rs 2,000.
The government has said the MDR is not a tax or a charge collected by the government or NPCI. Instead, it is distributed among participants in the payment ecosystem, including banks and payment application providers, to support the operation and continued expansion of UPI.
The change therefore places the long-running debate over UPI’s free-payment model at the centre of a broader question: how India can maintain the technology, infrastructure, fraud-prevention systems and security required by one of the world’s largest real-time payment networks while reducing dependence on recurring government funding.
About The Author
Comment List