India’s Unified Payments Interface (UPI) has transformed digital payments by offering free transactions, but it could soon see a major policy shift. The central government has proposed amendments to the Payment and Settlement Systems Act, 2007, allowing banks and payment service providers to charge a Merchant Discount Rate (MDR) on select UPI transactions in the future.
The final decision is pending, but the proposal suggests an MDR of 0.25% to 0.4% for merchant UPI transactions above Rs 2,000, while person-to-person (P2P) transfers would remain free. Government officials have not set a timeline for implementation.
Impact on High-Value Transactions
MDR is a fee merchants pay to banks and payment service providers for processing digital payments. Unlike UPI, credit and debit card payments already include MDR, typically borne by the merchant rather than the customer.
According to official estimates, only 5% of all UPI transactions exceed the proposed Rs 2,000 threshold. However, these high-value transactions account for nearly 65% of total transaction value, presenting a significant revenue opportunity for the payments ecosystem.
UPI continues to grow rapidly, facilitating approximately 23.7 billion transactions worth Rs 29.9 lakh crore, cementing its status as one of the world’s largest real-time payment networks.
An official explained the limited consumer impact: “Even if implemented, 95% of transactions will not face the merchant discount rate. Besides, not all businesses will pass on the fees, which will be a small amount.”
Long-Term Industry Prospects
Industry executives believe allowing a limited MDR on high-value merchant transactions could create a more sustainable business model for payment companies. Since UPI currently generates little direct transaction revenue, banks and payment providers argue that additional income would fund technology upgrades, improve payment infrastructure, and support future innovation.
According to Jefferies’ analysis, merchant UPI transactions above Rs 2,000 represent roughly 67% of merchant payment value despite accounting for only about 4% of transaction volume. The brokerage estimates that introducing MDR for this segment could generate Rs 5,000 crore to Rs 10,000 crore in annual revenue for the digital payments industry, potentially benefiting companies like Paytm and Pine Labs.
Industry sources expect the government to introduce a cap on the maximum fee charged. As one source noted, “Unlike credit cards, there is no funding cost involved, so it makes sense to have a ceiling once the costs are covered.”
For now, the proposed amendment only creates the legal framework to enable MDR. The government has not confirmed whether merchant charges will be introduced, what the final rates will be, or when such a policy could take effect. Until then, UPI transactions remain free under the existing system.
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