India’s Unified Payments Interface (UPI) has exploded in popularity over the last few years, processing tens of billions of transactions and trillions of rupees of value each year. To encourage adoption, the government mandated that UPI payments (and RuPay debit card payments) carry no Merchant Discount Rate (MDR) on the merchant side. In practice, this means merchants do not pay the processing fee that banks normally charge for card transactions. Instead, the government has historically subsidized UPI and RuPay payments through a budgeted incentive scheme.
Under this scheme (approved by Cabinet), the government pays an “incentive” to acquiring banks on small-value transactions (below ₹2,000) and to small merchants. That incentive is then shared among the acquiring bank, issuing bank, payment service provider, and app provider. In effect, UPI/P2M transactions have been free for both consumers and merchants in India since January 2020, after the Finance Ministry waived the MDR (previously up to 0.30% per transaction).
This arrangement has driven UPI’s remarkable growth. For example, in September 2024 UPI set a record with over 15 billion transactions in one month, processing about ₹20.64 lakh crore in value. By December 2024 UPI hit 16.73 billion transactions (over 539 million per day) at ₹23.25 lakh crore for the month. Importantly, not all of this value is commercial payments (person-to-person transfers are a large share), but even conservatively the P2M (merchant) volume runs into tens of lakh crores of rupees per year. (For instance, NPCI data indicate UPI merchant payments of about ₹40 lakh crore by January 2024 alone, implying perhaps ~₹60 lakh crore over a full fiscal year.)
These numbers highlight the scale of the UPI network. However, they also underscore the reliance on government support to keep it “free.” The MDR waiver was made possible by specific amendments to the Payment Systems Act and the Income Tax Act. In parallel, the government’s incentive payouts reached several thousand crores annually. For example, in FY2023-24 the government’s UPI/RuPay subsidy exceeded ₹3,000–3,600 crore. The scheme is designed primarily to incentivize low-value transactions at small merchants, with a 0.15% incentive per transaction (capped at ₹5) for payments below ₹2,000 to merchants with limited turnover. Because 90% of India’s ~60 million digital merchants are classified as “small,” the bulk of subsidies flowed to these segments.
Cuts to Incentives and Industry Concerns
In recent months, however, the government has scaled back that support. In March 2025 a Gazette notification approved only ₹1,500 crore for FY2024–25 (starting April 2024) to promote low-value UPI payments, roughly half the prior year’s allocation. That subsidy is strictly limited to small merchants and small transactions, meaning that much of the UPI volume (especially at large merchants and high-value payments) will no longer be subsidized by the state. In practical terms, the Rs. 1,500 cr covers only the shallow end of what banks and PSPs say they need: industry groups have estimated roughly ₹10,000 crore per year is required just to maintain and expand the UPI ecosystem.
The cut has put the spotlight on the sustainability of free UPI. Fintech executives warn that without adequate funding, growth may be hard to sustain. One payments industry CEO told that “without the subsidy payments, sustaining this fast-growing digital payments industry will be challenging,” noting that by January 2024 banks had already processed about ₹2 lakh crore in RuPay and ₹40 lakh crore in UPI merchant volumes in the current year.
The PCI chairman, Vishwas Patel, put it bluntly: compliance and infrastructure costs are rising, yet “the budgetary outlay has not reached any of the payments aggregators or banks since April 2023”. In short, banks and fintechs are bearing the cost of processing an enormous volume of transactions with little revenue stream. Against this backdrop, industry representatives have begun urging a return to an MDR-type charge on large-merchant UPI transactions. An industry association, the Payments Council of India (PCI), sent a letter to the Prime Minister’s Office in March 2025 requesting the reintroduction of MDR on UPI (and RuPay) purchases, but only for “large” merchants.
The PCI argues that 90% of merchants (the small ones) would remain unaffected, while large enterprises would pay a modest fee. For example, the PCI letter proposed a 0.3% MDR on UPI transactions for merchants above a certain turnover threshold. The PCI emphasizes that this aligns with existing practice: credit card and non-RuPay debit transactions already carry MDR of 1–2%, so a 0.3% levy on UPI is still well below those fees.
Positions of Key Stakeholders
- Government (Finance Ministry and RBI): Recent media reports indicate that the Finance Ministry and the Reserve Bank (and its payments arm NPCI) are sympathetic to imposing an MDR on UPI for large merchants. A story (April 2025) cited unnamed sources saying that India’s finance ministry supports allowing a small UPI fee on large players. The same report noted that India’s payments authority (NPCI, under RBI oversight) is urging a fee to boost investment and sustain UPI’s infrastructure. The final decision would rest with the Prime Minister’s Office, but the signals from regulators are clear: they are concerned that UPI’s “slowing growth” could be revived by monetizing it for high-volume merchants. Importantly, media have noted that any MDR would be borne by merchants and not passed on to consumers. One industry executive emphasized that this fee “will not be passed on to customers”, and a source in another report confirmed that “large merchants will not be allowed to pass on MDR to consumers, they must bear it as a cost of doing business”.
- Payments Council of India (PCI) and Fintech Industry: The PCI, an umbrella for many fintech payment providers (PAs and PSPs), is leading the public push for MDR. In its letter and statements, PCI argues that the current subsidy model is insufficient and that adding a small MDR on the biggest merchants would provide a sustainable revenue stream. PCI noted that the current ₹1,500 cr incentive “covers only a fraction” of the ~₹10,000 cr estimated annual cost. It called MDR “the lifeline of the digital payments ecosystem” and warned that without it “the sustainability of the entire infrastructure is at risk”. PCI also points out that the roughly 5 million “large” merchants (out of ~60 million UPI-accepting merchants) typically already pay 1–2% on card transactions, whereas a 0.3% UPI fee is far lower. In short, PCI insists the burden on consumers and small players will remain zero, while the ecosystem as a whole gains funding. Many fintech CEOs echo this view. PCI chairman Vishwas Patel has stated that large firms should shoulder MDR and the zero-charge privilege “should only be for small and medium merchants,” suggesting an MDR of about 0.2–0.3% is reasonable for big players. Paytm’s CEO has publicly agreed that an MDR could spur healthy competition and help improve service levels. (Notably, even Amazon Pay’s CEO Vikas Bansal has argued that some MDR on UPI would ensure smaller players get a fair share of payments revenue, though in that context he was referring to small merchants.)
- Banks and Payment Service Providers (PSPs): Banks (who act as UPI issuers and acquirers) strongly back the MDR proposal, citing rising costs. Senior banking executives have told reporters that banks are currently “bearing losses” on UPI, with ongoing expenses for servers, upgrades, security, and compliance. One banker noted that without revenue from MDR, “sustaining UPI’s growth will be difficult”. The RBI has also been pressuring banks and apps to invest in uptime and security; for example, NPCI recently mandated faster API response times and tighter limits to prevent outages, all of which incur costs. In short, banks view MDR on large merchants as a way to fund a network on which their balance sheets and technology resources are already deeply invested. Payment Service Providers (the banks and fintechs that provide UPI interfaces) likewise anticipate that without it, the financial burden of processing record volumes (hundreds of millions of transactions per day) could hamper future innovation or reliability.
- Payment Aggregators (PAs): Large digital payment aggregators (e.g. PhonePe, Paytm, Razorpay, PayU, Pine Labs, etc.) are also generally aligned with the PCI view. Since these firms do much of the merchant onboarding and settlement, they have been bearing the interim cost of growth. As one industry CEO put it, the fintech sector is “really suffering due to increased compliance costs and rising infrastructure costs for processing a huge number of UPI transactions with zero revenue”. Major PAs, which collectively hold the bulk of market share for merchant acquiring, have argued that shifting even a fraction of UPI to an MDR model for large clients would help cover these costs, while leaving small merchants untouched.
- Large Merchants (e.g. Amazon, Zomato, Zepto, Swiggy): To date, the large merchant community has been mostly passive on the MDR debate. News reports have identified a shortlist of big players (Amazon, Zomato, Swiggy, Dream11, Zepto, etc.) as likely to be affected, but there have been few public statements from those companies. (One incident noted that airline Jet Airways had complained about a surprise MDR on a credit-card UPI payment, but it was unrelated to policy.) It is reasonable to infer that major e-commerce and on-demand platforms would resist new costs on payments, especially since UPI has been a cheap or free channel for them. Industry sources say the government and RBI plan to define the threshold (possibly by daily transaction volumes or annual turnover) to limit who is considered “large.” Any UPI surcharge imposed by banks cannot be passed on to customers, so these companies would absorb it. In theory, they could respond by promoting alternate payment methods or seeking other cost reductions, but until a final rule is announced, they have offered no unified stance. (Most industry discussion has focused on the banks/fintech side rather than merchant backlash.)
Financial Impact Estimates
A critical question is how much revenue a 0.25%–0.30% MDR on large UPI merchants would generate. Consider some hypothetical scenarios using NPCI’s transaction data. In FY2023–24 UPI processed roughly ₹213.8 lakh crore total (in all transactions), of which person-to-merchant (P2M) volume was on the order of ₹59.3 lakh crore (per NPCI reports). (Another industry estimate put merchant volume at about ₹40 lakh crore by Jan’24, consistent with ~60 lakh crore annually.) If we assume “large” merchants account for a fraction of this – say 10%, 20%, 50%, etc. – then the annual MDR takings would be:
- 10% of P2M (≈₹5.9 lakh crore): 0.25% MDR ⇒ ~₹1,480 crore; 0.30% ⇒ ~₹1,779 crore.
- 20% of P2M (≈₹11.9 lakh crore): 0.25% ⇒ ~₹2,965 crore; 0.30% ⇒ ~₹3,558 crore.
- 50% of P2M (≈₹29.7 lakh crore): 0.25% ⇒ ~₹7,412 crore; 0.30% ⇒ ~₹8,895 crore.
In other words, even a modest penetration of large merchants yields several thousand crores per year in MDR revenue. For context, PCI has estimated roughly ₹10,000 crore is needed annually for UPI’s expansion. So for example, if large merchants do 20–30% of the volume, a 0.3% MDR might raise on the order of ₹4,000–5,000 crore. That would cover some of the gap left by the subsidy cuts, though by no means all; to fully replace a ₹10,000 crore shortfall would require either a higher MDR, a wider base of merchants, or renewed government funding.
It is important to note these fees remain very low by historical standards. Before 2020, banks did charge a 0.3% MDR on UPI transactions, the very rate now being discussed. Under the proposed scheme, big merchants would essentially be reverting to the old pre-waiver rate, which is still far below the 1–2% that card-accepting merchants routinely pay. Even at ₹3,500 crore (0.30% of 20% of P2M) or ₹8,900 crore (0.30% of 50% of P2M), the new MDR pool would be on the order of the government’s annual subsidy prior to the cut.
Sustainability and Infrastructure Costs
Supporters of MDR argue it would inject “the much-needed revenue to modernize and secure UPI”. The UPI network is rapidly evolving, for instance, NPCI has mandated faster API turnaround, stricter limits on query calls, and other technical upgrades to reduce outages. These improvements require investment. RBI officials have noted that various players incur an average cost of about ₹2 per UPI transaction (covering hardware, software, security, etc.), a non-trivial sum when multiplied by billions of transactions. With UPI usage now a core banking service, even slight per-transaction costs add up.
Banks point out they must also handle costs like fraud prevention, settlements, and credit/e-payroll integration (UPI now even supports overdrafts and BNPL in some cases). The global backup capacity and real-time settlement system behind UPI is maintained by NPCI (under RBI supervision) but ultimately funded by member banks and paid via tariffs; tariffs that have been effectively zero for years. Payment Aggregators and Banks collectively argue that without a revenue model, they cannot indefinitely “bear losses” on every UPI push transaction. Introducing MDR on large merchants (who arguably can afford it) is seen as one way to share the ecosystem’s costs more equitably and ensure funds for future innovations (like tokenization, CBDC integration, advanced fraud monitoring, etc.).
Opponents, however, worry that any fee could dampen adoption. If large online businesses see UPI becoming more expensive, they might slow its promotion (or push other payment routes), although with the no-surcharge rule, consumer fees would not rise. The real test will be whether the MDR revenues actually get reinvested in system stability. So far, banking officials say they’ve had to front the bill: “the budgetary support is expected to go up” with growth, but in reality payments firms report no subsidy payouts since April 2023. PCI and some fintech CEOs hint that without MDR, the quality of UPI (in terms of uptime, speed, new features) could suffer in the long run.
Implications for Merchants and Consumers
If implemented, the proposed MDR would have clear winners and losers. Large merchants would see their payment processing costs rise slightly, typically from 0 to 0.25–0.30% of each UPI transaction value. For a ₹1,000 purchase, for instance, a 0.3% MDR is just ₹3. But by regulation, they cannot pass that fee on to buyers. In effect, it would be an incremental business expense.
Industry logic suggests it pales beside the ~1–2% they pay on card swipes. Many large merchants likely already price their offerings with card MDR in mind, so a small new fee may not drastically change their economics. Still, there could be reactions; for example, some platforms might slightly reduce their cashbacks, or renegotiate profit splits with partners, but overall consumer pricing and UPI acceptance should remain unchanged by the rule.
Small merchants and ordinary consumers would see almost no direct impact. By definition, the MDR proposal spares small merchants entirely. All UPI transactions at small shops (below the threshold) would continue to be free, with the government subsidy (15 bps per payment) covering those. Consumers pay nothing extra when using UPI anywhere, a point emphasized in public reports. Therefore, the day-to-day experience of UPI for most people should remain as before. In theory, a charge on large merchants could slow down the introduction of new payment offers or wallets on some big platforms, but it does not create a direct surcharge or tax on users.
The broader economic effects are mixed. Proponents say a small MDR on the biggest players would have negligible effect on UPI adoption (since UPI would remain dramatically cheaper than cards) and would stabilize the system. Critics argue it sends the wrong signal about India’s commitment to free digital payments. Some worry it might create administrative complexity (who qualifies as “large” on any given day?). However, because the announced policy explicitly bans passing costs to customers, the consumer welfare impact should be minimal. Merchants essentially “absorb” the fee as a cost of doing business, similar to how they do for credit cards. In practice, the UPI adoption curves by users (mostly person-to-person) and by small merchants should continue upward unabated.
The bottom line
India’s UPI has revolutionized digital payments, but at the cost of a largely subsidized model. The recent budgetary cuts have reignited a debate over “who pays” to sustain it. Major payment industry stakeholders (banks, fintechs, regulators) are now coalescing around a proposal to charge the largest merchants a modest MDR (around 0.25–0.30%).
The Finance Ministry and RBI appear amenable, and the PCI has formally advocated it as a lifeline for the ecosystem. If enacted, this policy shift would mark a clear departure from the “free UPI for all” paradigm that prevailed since 2020. It would raise several thousand crores in new revenue (depending on how many transactions qualify), revenues that could, in theory, be reinvested into UPI’s infrastructure and innovation. However, it carries questions about fairness and impact. The policy explicitly bars any consumer fee, so in that sense customers benefit. But large merchants must weigh this new cost against other payment options.
The debate is far from settled. There is some dissension within the payments industry too (reports say even within PCI some members privately questioned the move). Final decisions may hinge on tradeoffs between fiscal constraints, digital growth targets, and political considerations. For now, the “UPI shift” away from blanket government subsidy and toward partial merchant-financed MDR is under active consideration, with key voices on each side making their case. The outcome will reshape the economics of India’s payments landscape, potentially allowing banks and NPCI to invest more in UPI’s future, at the cost of ending the last vestige of wholly free digital payments for big businesses.
