India's Unified Payments Interface (UPI) has revolutionized digital payments by offering free transactions, but it could soon undergo a major policy change. The Central Government has proposed amendments to the Payment and Settlement Systems Act, 2007, so that banks and payment service providers can charge a Merchant Discount Rate (MDR) on select UPI transactions in the future.
The final decision is yet to be made, but the proposal might allow for an MDR of 0.25% to 0.4% for merchant UPI transactions above Rs. 2,000, with free person-to-person (P2P) transfers. Currently, there is no timeline for implementing the proposal, as per government officials.
Merchants pay banks and payment service providers a fee to process digital transactions, called an MDR. In contrast to UPI, payments made using credit and debit cards already include MDR, although this is commonly paid by the merchant rather than the customer.
As per an official estimate, just 5% of all UPI transactions are above the proposed Rs. 2,000 threshold. However, these transactions represent almost 65% of the total transaction value, which makes it a huge opportunity for the payments ecosystem to generate revenue.
UPI continues to grow exponentially. The platform has facilitated around 23.7 billion transactions worth Rs. 29.9 lakh crore, which solidified its status as one of the world's biggest real-time payment networks.
Explaining the limited consumer impact, an official said, "Even if implemented, 95% of the transactions will not face the merchant discount rate. Besides, not all businesses are going to pass on the fees, which will be a small amount."
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According to industry executives, 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 service providers argue that additional income would help fund technology upgrades, improve payment infrastructure and support future innovation.
According to an analysis by Jefferies, merchant UPI transactions above Rs. 2,000 account for roughly 67% of merchant payment value despite representing only around 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 such as Paytm and Pine Labs.
Industry sources also expect the government to introduce a cap on the maximum fee charged. As one industry 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 will continue to remain free under the existing system.