The Indian government is reportedly preparing to introduce a merchant discount rate (MDR) on certain Unified Payments Interface (UPI) transactions, potentially set at around 0.4%. This move aims to balance growing transaction volumes with sustainable revenue models for banks and payment providers.
- MDR may be fixed at 40 basis points on select UPI transactions.
- Issuing banks could receive 40% of the MDR revenue share.
- Consumers and peer-to-peer payments remain free of charges.
What happened
The Indian government is set to notify a framework introducing a merchant discount rate (MDR) on select Unified Payments Interface (UPI) transactions, with a likely fee around 40 basis points (0.4%) of the transaction amount. Under the proposal, issuing banks would receive the largest share of this fee—approximately 40%. Third-party application providers (TPAPs) like PhonePe and Paytm, along with acquiring banks, would share the remaining fee equally at about 30% each.
This framework has not been formalized yet, and the exact transaction thresholds and merchant eligibility rules might shift as final decisions are made. The National Payments Corporation of India (NPCI) is currently working on the operational details. This development follows recent amendments to the Payment and Settlement Systems Act that allow the Centre to determine which electronic payments will be exempt from MDR.
Why it matters
The introduction of an MDR for UPI transactions marks a significant policy shift from the current zero-MDR regime implemented to accelerate digital payment adoption. While this zero-fee approach has driven UPI to process billions of transactions monthly, it has also resulted in substantial subsidy costs for the government and payment players. Banks and payment companies have depended on government incentives to cover transaction processing costs, with incentive budgets fluctuating in recent years.
The move to levy MDR is driven by sustainability concerns as transaction volumes and values grow rapidly. The zero-MDR subsidies reportedly do not fully compensate banks and payment companies for infrastructure and operational expenses. Establishing an MDR would create a new revenue stream, potentially reducing the government’s financial burden while providing clearer monetization opportunities for payment ecosystem participants.
What to watch next
The details of the MDR framework—including the finalized fee rate, transaction thresholds, and eligible merchant categories—are expected to be officially announced in the coming weeks. Market participants will also watch for how the MDR impacts the cost equation for merchants, payment providers, and banks, especially given that peer-to-peer payments and consumer UPI transactions will remain free of charge.
Another key development will be how the MDR implementation affects user behavior and the adoption of digital payments across sectors. The government’s approach to structuring differential fees across businesses and industries could influence the overall growth trajectory of UPI payments. Additionally, responses from major TPAPs and banks will shed light on evolving business models in India’s fast-growing payments landscape.