https://www.financialexpress.com/opinion/upis-next-test-durability-of-mdr-regime/4340732
By Ranadurjay Talukdar
India’s new merchant discount rate (MDR) framework marks UPI’s transition from subsidy-supported scale to financially sustainable digital infrastructure. From October 15, eligible bank account-funded person-to-merchant (P2M) payments above Rs 2,000 will attract MDR of up to 0.40%, capped at Rs 300. Person-to-person transfers, payments of up to Rs 2,000, and eligible small merchants receiving monthly UPI credits of up to Rs 1 lakh remain protected. Consumers cannot be charged, while payment applications are prohibited from imposing platform or hidden fees.
The policy is narrowly targeted by transaction count but significant by value. The National Payments Corporation of India (NPCI) ecosystem statistics show that UPI processed 24.51 billion transactions worth Rs 29.82 lakh crore in August. Merchant payments above Rs 2,000 represented only around 4% of the P2M volume, but approximately 67% of P2M value, amounting to nearly Rs 6 lakh crore during the month.
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Annualising this Rs 6 lakh crore produces a high-value P2M base of approximately Rs 72 lakh crore. At 0.40%, the theoretical annual MDR ceiling is Rs 2,880 crore. However, this is not a revenue forecast. The realised pool will be lower because the NPCI data include transactions subject to the Rs 300 cap, qualifying small-merchant exemptions, mandate exclusions, and concessional sectoral rates. Pre-notification estimates ranging from Rs 10,000 crore to above Rs 20,000 crore assumed a substantially broader charging base and should therefore not be applied mechanically to the final framework.
For standard-rate transactions, the issuing bank, which holds the customer’s account, retains 0.16% or an estimated Rs 1,152 crore annually. The acquiring side, comprising the merchant’s bank and, where applicable, its payment aggregator (manages the merchant relationship), retains 0.12% or Rs 864 crore. The payer payment service provider, the bank connecting the UPI app to the network, retains 0.04% or Rs 288 crore. The third-party application provider, the customer-facing app, receives 0.08% or Rs 576 crore. These estimates use the theoretical annual MDR ceiling of Rs 2,880 crore and are before operating costs and contributions to the small-merchant fund.
The actual pool will depend heavily on the transaction mix. Fuel, agricultural inputs, railways, telecommunications, utilities, government payments, insurance, education, wallet top-ups, and tolls attract a flat Rs 5 above Rs 2,000. Capital-market payments attract 0.02%, capped at Rs 300. Flat pricing protects public-service and thin-margin sectors but means a large insurance premium may generate the same MDR as a Rs 3,000 fuel purchase.
Securities require special attention. Funding a brokerage account is not necessarily a purchase: money can remain uninvested, be withdrawn, or be repeatedly transferred without generating brokerage revenue. Yet every eligible funding transaction creates a cost for the intermediary. A Rs 1 lakh transfer attracts Rs 20 and the Rs 300 cap is reached only at Rs 15 lakh. Automatic SIPs through UPI mandates remain outside the framework.
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The effects on other UPI products will be uneven. RuPay credit-card-on-UPI and pre-sanctioned credit lines remain outside the new account-funded MDR and continue under separate credit-product pricing. Consequently, the same QR can impose different merchant costs depending on whether payment is funded from a deposit account, card, or credit line. Account-funded UPI, at 0.40% and with a Rs 300 cap, should usually remain materially cheaper than credit-card acceptance, where MDR typically ranges from 1.5% to 2.5%. Merchants may thus prefer account-funded UPI, while banks retain incentives to promote credit-linked UPI because it generates lending, interchange, and customer-engagement income.
Wallet businesses receive limited direct relief through the flat Rs 5 charge on top-ups above Rs 2,000, while wallet-funded interoperable UPI remains governed by separate PPI (prepaid payment instrument) economics. Wallets are therefore unlikely to regain relevance merely as payment instruments. Their competitive case will increasingly depend on loyalty, controlled spending, transit, gifting, and low-value offline use cases.
Macroeconomically, the framework replaces part of the taxpayer-supported model with commercial funding for resilience, cybersecurity, fraud controls, and innovation. Because over 95% of P2M transactions by volume remain below Rs 2,000, the effect on everyday digital behaviour should be limited. The Rs 300 cap also keeps UPI substantially cheaper than cards for larger payments. This could strengthen UPI’s competitive position against cards rather than weaken it.
A broad return to cash is unlikely because consumers pay nothing, smaller merchants remain protected, and UPI is deeply embedded in checkout behaviour. However, thin-margin merchants selling electronics or other high-ticket goods may offer cash discounts, steer customers towards bank transfers, or absorb the MDR through lower margins. Preventing direct and disguised surcharging will therefore be important for preserving digitisation and transaction transparency.
Differential pricing also creates merchant category code (MCC) misclassification risk, with merchants or intermediaries potentially using concessional categories to obtain lower MDR or interchange. Acquirers and payment aggregators should continuously validate MCCs against GST profiles, websites, invoices, and product catalogues; analyse ticket sizes, transaction velocity, threshold clustering, and peer-group deviations; and use AI-led anomaly detection to prioritise cases for human review. Deliberate miscoding should trigger retrospective fee recovery, stringent fines, suspension, and escalating action against repeat offenders.
The policy balance is broadly sound. Its success will depend on whether sustainable economics can be created without reviving cash usage, distorting competition between payment instruments, or allowing merchants to transfer costs indirectly to consumers.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.
This article was first uploaded on September sixteen, twenty twenty-six, at twelve minutes past nine in the night.
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