Unified Payments Interface (UPI) has revolutionized digital transactions in India, providing a fast, seamless, and cost-free method for users to send and receive money. However, this may soon change as the Payments Council of India (PCI) has proposed reinstating the Merchant Discount Rate (MDR) on UPI and RuPay transactions. This move, if approved, could significantly alter the digital payment landscape in the country.
With government subsidies being reduced, financial institutions and payment service providers argue that they need sustainable revenue sources to maintain and expand the digital payment infrastructure. This article delves into the impact, reasons, and future implications of bringing back MDR fees on UPI transactions.
What is UPI?
Unified Payments Interface (UPI) is an instant real-time payment system developed by the National Payments Corporation of India (NPCI). It allows users to transfer funds between bank accounts through a single interface, eliminating the need for multiple banking apps.
Key Features of UPI
- Instant money transfers between banks.
- No transaction fees (currently) for users and merchants.
- Seamless integration with various payment platforms like Google Pay, PhonePe, Paytm, and banking apps.
- High security standards, including two-factor authentication.
UPI has been a key driver of India’s digital payment revolution, processing a staggering 16 billion transactions in February 2025 alone, amounting to nearly ₹22 lakh crore.
Were UPI Transactions Always Free?
No, UPI transactions were not always free.
How UPI Became a Zero-MDR System
In December 2019, Finance Minister Nirmala Sitharaman announced that MDR charges would no longer apply to transactions made through UPI and RuPay debit cards, effective January 1, 2020. Before this, merchants paid an MDR fee of less than 1% per transaction, which was shared among banks, payment service providers, and fintech companies. The government introduced financial incentives to compensate payment providers for processing transactions. However, with government subsidies significantly reduced in FY25, industry experts argue that a return to MDR fees is essential for the financial sustainability of digital payment platforms.
What is MDR (Merchant Discount Rate)?
The Merchant Discount Rate (MDR) is a fee charged to merchants by banks or payment service providers for processing digital payments.
| Payment Method | MDR Rate (Before 2020) | Current MDR Rate |
|---|---|---|
| Credit Cards | 1% – 3% | 1% – 3% |
| Debit Cards | 0.5% – 1% | 0.5% – 1% |
| UPI Transactions | <1% | 0% |
| RuPay Debit Cards | <1% | 0% |
For example, if a shopkeeper receives ₹5,000 from a customer using a credit card with a 2% MDR fee, they must pay ₹100 to process the transaction. However, UPI transactions currently have no such fees, making them the preferred mode of payment for many businesses.
Why is the Industry Pushing for MDR on UPI Transactions?
The payments industry is advocating for the return of MDR fees due to financial constraints.
Key Reasons for MDR Reintroduction
- Declining Government Subsidies The Indian government allocated ₹3,500 crore in FY24 to compensate for zero MDR fees. This budget has been slashed to ₹1,500 crore in FY25, covering only a fraction of the estimated ₹10,000 crore annual cost required to maintain UPI services.
- Sustainability of Digital Payment Infrastructure Processing billions of UPI transactions requires constant investments in cybersecurity, fraud prevention, compliance, and merchant onboarding. Without MDR fees, banks and fintech firms struggle to maintain quality service and innovation.
- Leveling the Playing Field UPI and RuPay debit cards currently do not generate revenue for payment providers, unlike credit cards, debit cards, and mobile wallets, which charge MDR fees. Industry players argue that introducing a nominal MDR fee (0.3%) would create a fair competitive environment.
What Happens If MDR is Reintroduced?
Reintroducing MDR fees on UPI transactions could have significant consequences for businesses, consumers, and India’s digital payment ecosystem.
Potential Impact on Merchants
- Increased Operational Costs – Merchants may have to pay transaction fees on UPI payments, affecting profit margins.
- Cost Passed to Consumers – Businesses might raise prices or charge extra fees for digital payments.
- Preference for Cash Payments – Some merchants might encourage cash transactions to avoid paying MDR, slowing down India’s digitalization efforts.
Impact on Consumers
- Higher Prices – Businesses may pass on MDR charges to customers through increased product pricing.
- Limited Payment Options – Some stores might restrict UPI transactions if MDR fees apply.
Impact on Digital Payment Providers
- Revenue Generation – MDR fees would provide financial sustainability to banks and fintech firms.
- Improved Services – With a stable revenue stream, providers can enhance cybersecurity, user experience, and customer support.
FAQs About UPI Transaction and MDR Charges
1. Will I be charged for using UPI as a customer?
No. The MDR fee applies only to merchants, not to individuals making UPI transactions. However, some merchants may add extra charges to compensate for the MDR fees.
2. Why was MDR removed in 2020?
The Indian government eliminated MDR fees on UPI and RuPay transactions to promote digital payments and encourage small businesses to adopt cashless transactions.
3. How much MDR is being proposed for UPI transactions?
The industry has suggested an MDR of 0.3% for UPI and RuPay transactions, but only for large merchants who already pay MDR on credit and debit card transactions.
4. Will MDR on UPI transactions slow down digital payments?
Possibly. If businesses start discouraging UPI payments due to MDR fees, it could lead to an increase in cash transactions, slowing down India’s digital financial ecosystem.
5. When will the government decide on MDR charges?
The proposal is under review, and a final decision is expected in the coming months. The government will likely consider its impact on businesses, consumers, and the broader digital economy before making a ruling.
Conclusion
The possible return of MDR fees on UPI transactions marks a significant turning point in India’s digital payments landscape. While the move aims to ensure financial sustainability for payment providers, it may also increase costs for merchants and consumers, potentially slowing down digital adoption.
The government faces a challenging decision—balancing the growth of digital payments while ensuring that financial institutions can sustainably operate. As discussions continue, stakeholders across industries will closely watch the outcome, as it will shape the future of UPI payments in India.
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