UPI MDR debate: UPI is one of India’s most successful digital public infrastructure projects. It has changed retail payments at home and is now being watched and adapted abroad. Yet its success has created a harder policy question: should Unified Payments Interface transactions remain free for every user and every merchant?
The question is no longer a quiet concern raised by banks and payment companies. The Parliamentary Standing Committee on Finance has flagged the unsustainability of the zero merchant discount rate regime. The committee has asked the Department of Financial Services to examine a tiered MDR structure under which street vendors and small businesses remain exempt, while larger entities contribute to the cost of the system.
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Launched in 2016 by the National Payments Corporation of India, under the oversight of the Reserve Bank of India, UPI has become the backbone of India’s retail digital payments system. In FY2025-26, UPI processed 24,161.69 crore transactions worth ₹314 lakh crore. March 2026 alone saw a record 2,264 crore transactions worth ₹29.53 lakh crore. The number of banks live on the platform rose from 21 at launch to 703 by March 2026.
This success was built on a clear policy choice: keep UPI free. That choice helped adoption. It cannot, by itself, sustain the system indefinitely.
Zero MDR and the cost of UPI
Since January 2020, UPI transactions have operated under a zero-MDR regime. Merchants are not charged for accepting payments. To compensate banks, payment system operators and app providers, the government introduced an incentive scheme through the Union Budget. The current scheme covers low-value BHIM-UPI person-to-merchant transactions up to ₹2,000 for small merchants.
The compensation has not matched actual costs. Data cited by the Department of Financial Services before the parliamentary committee showed that incentive support covers only about 11% of industry costs and 14% of the potential MDR revenue that could have been collected.
Digital payment systems are not costless. UPI requires spending on servers, cybersecurity, fraud control, dispute resolution, compliance, customer support and network reliability. These costs rise with transaction volumes. They also rise with fraud risks and user expectations.
Budget support has not offered a stable answer. The Union Cabinet approved a ₹1,500 crore incentive scheme for FY2024-25 for low-value BHIM-UPI P2M transactions, targeted at small merchants. The parliamentary discussion for FY2026-27 referred to a ₹2,000 crore allocation, against ₹2,200 crore in FY2025-26.
A system processing billions of transactions every month cannot depend only on uncertain annual allocations. Without a revenue model, the burden falls on the exchequer, banks, payment companies, or the quality of investment. That is not a sustainable arrangement.
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Tiered MDR for large merchants
The proposal now being discussed is not a blanket fee on UPI. The parliamentary committee has recommended that individual users and small merchants remain protected from charges. The fee would apply to large commercial entities such as organised retail chains, e-commerce platforms and high-volume institutional users.
This is the right place to begin the debate. UPI’s early years required subsidy on both sides of the market. Consumers had to be persuaded to shift from cash. Merchants had to be encouraged to accept digital payments. That phase has largely passed.
UPI now has mass adoption, deep bank participation and near-universal visibility at the point of sale. The policy problem has changed. It is no longer adoption. It is viability.
A tiered MDR recognises that distinction. It preserves free access for small merchants and individual users, while asking large commercial users to contribute to the cost of the network they depend on.
UPI MDR debate: Protect small merchants and consumers
The case against MDR cannot be dismissed. Payment charges can deter small merchants if poorly designed. They can also be passed on to consumers through higher prices, surcharges or minimum transaction thresholds.
That risk is real. It is also manageable. The current incentive design already distinguishes between small and large merchants. For transactions up to ₹2,000, small merchants receive zero MDR with a 0.15% incentive, while large merchants receive zero MDR but no incentive. This shows that differentiated treatment is administratively possible.
The greater sensitivity lies on the consumer side. Any charge on ordinary users would damage trust and slow usage. The MDR debate should therefore remain focused on large merchants, not consumers.
Large retailers, platforms and institutional users receive clear gains from UPI. It reduces payment friction, improves settlement, expands reach and lowers cash-handling costs. For such entities, a modest MDR is unlikely to change behaviour. The more serious question is whether they will pass the cost on to consumers.
This is where the design of the MDR framework becomes decisive. A tiered MDR will protect consumers only if large merchants are barred from imposing direct UPI surcharges or recovering the fee through opaque convenience charges. Platforms could otherwise shift the cost through seller commissions, delivery fees, minimum order values or differentiated pricing. The regulator must prescribe disclosure norms, audit trails and penalties for circumvention. MDR revenue should also be ring-fenced, at least partly, for network resilience, fraud prevention, grievance redress and rural expansion. Without such safeguards, the policy may solve the revenue problem while creating a consumer-protection problem.
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UPI needs investment for its second decade
UPI still needs investment. Rural infrastructure remains uneven. Fraud prevention needs constant strengthening. Merchant onboarding and grievance redress must improve. Cross-border UPI use will require higher standards of security, reliability and interoperability.
There is also a competition question. NPCI’s proposed 30% market share cap for UPI apps has been deferred to December 31, 2026. PhonePe and Google Pay together had more than 85% of the digital payments market when the extension was reported. Any future MDR framework must not deepen concentration in the payments ecosystem.
These improvements need stable funding. Annual budget support alone cannot carry that burden. Nor should banks and payment firms be expected to absorb rising costs without a clear commercial framework.
UPI’s public-good character must be preserved. That does not mean every participant must use it free of charge forever. A mature digital infrastructure needs a financing model that protects inclusion while sustaining investment.
The choice is not between free or expensive UPI. The choice is between an unmanaged subsidy and a calibrated MDR framework. The former helped UPI scale. The latter may be needed to keep it reliable.
For UPI’s second decade, the objective should be clear. Consumers and small merchants must remain protected. Large commercial users must contribute modestly. The government must regulate the structure tightly. Without that balance, India risks weakening one of its most successful digital achievements.