Summary
India is weighing a return of the merchant discount rate (MDR) on UPI, potentially ending its decade-long zero-cost experiment. UPI has grown into one of the world's biggest real-time payment networks — 23.6B transactions worth ~$313.5B in July 2026, 550M+ users — but its infrastructure (servers, settlement, fraud detection, cybersecurity) is not costless, and the government has long compensated banks and payment firms. The proposal under discussion would apply a nominal MDR (0.3-0.5%) only to larger transactions at big merchants, leaving small merchants and P2P free. But the economics of who pays — and how payment aggregators and merchants absorb the fee — are complex.
Key Points
- Proposed MDR: 0.3-0.5% on some UPI transactions at large merchants
- Target threshold option: >₹2,000 at larger merchants (~4% of merchant volume but ~67% of value, Jefferies)
- Potential MDR pool: ~₹13,500-16,000 crore (~$1.6-1.9B) annually
- Consumer and P2P UPI remain free; government has yet to set rate/scope
- Payment aggregators already charge ~2% platform fee to mid-size online merchants
- Banks stand to benefit most from MDR; upside limited if they compete aggressively on mid-market pricing
- Nitesh Singhal (ex-Axis UPI head): 2020 MDR ban "didn't change the plumbing, it just emptied the pipe"
- Research (Motheram & Buteau): merchant acceptance was a key driver of UPI growth — pricing must protect marginal merchants
- Brazil's Pix is the benchmark: free for individuals, low-cost charges for businesses
- LocalCircles 2024: 75% of UPI users said they'd stop using it if fees were introduced
- The amendment (Taxation and Other Laws Bill 2026) lets the central government decide which digital methods are fee-protected
- NPCI also eyeing overseas UPI expansion (Japan, Malaysia, Bahrain; 15-20 markets over a decade)