Centre Rejects External Pressure Claims Over UPI MDR Rollout

Amid the ongoing debate over the introduction of MDR on select UPI transactions, the finance ministry’s Department of Financial Services (DFS) has said the move was not driven by “external pressure”.

The clarification came after allegations linked the reintroduction of MDR on UPI to the US Trade Representative’s (USTR) 2026 National Trade Estimate Report, which flagged India’s digital payment policies as a barrier for foreign payment service providers.

In a statement, the DFS highlighted two concerns raised in the USTR report — the inability of US payment service providers to participate in the UPI ecosystem, including credit card transactions, on a level playing field with RuPay, and NPCI’s proposed 30% market share cap for third-party application providers (TPAPs). 

Responding to the first concern, the DFS pointed to NPCI’s Tuesday’s (September 15) circular, saying credit card transactions on UPI continue to be permitted only through RuPay credit cards.

According to the ministry, this is part of a deliberate policy to make RuPay the preferred credit card network among Indian users.

On the TPAP market share cap, the DFS said NPCI introduced the 30% limit in November 2020, but it could not be enforced because smaller payment apps lacked a self-sustaining revenue model needed to compete with market leaders.

The government said introducing MDR on select high-value UPI transactions would provide these players with a revenue stream and enable more domestic companies to expand their operations.

It added that the move was aimed at protecting India’s sovereignty in the electronic payments ecosystem.

The DFS also linked the policy to the government’s efforts to promote RuPay credit and debit cards as domestic alternatives to global card networks. RuPay debit-card payments will continue to remain outside the MDR framework.

“The allegation that MDR has been introduced under any external influence is patently false and misleading,” the ministry said.

The MDR Uproar

Beyond the “external pressure” allegations, the new UPI MDR framework has drawn opposition from retailer and fuel dealer associations, capital-market platforms, and consumers over its potential cost impact. 

Retailer groups have raised concerns over the additional cost and its potential impact on UPI acceptance.

“Small merchants will now think twice about whether to accept cash or UPI. During the festive season, a larger share of transactions cross the ₹2,000 mark, and the moment a fee attaches itself to digital payment, cash becomes the path of least resistance,” Retailers Association of India CEO Kumar Rajagopalan said.

The framework provides concessional rates for certain sectors. Fuel, insurance, railways, telecom, and utility payments above ₹2,000 will attract a flat MDR of ₹5 instead of the standard 0.4% charge.

However, the All India Petroleum Dealers Association (AIPDA) has sought the finance minister’s intervention over the payment processing costs arising from the framework. The association subsequently held discussions with senior officials at the Ministry of Petroleum and Natural Gas.

Meanwhile, UPI transactions above ₹2,000 involving mutual funds, securities, and stockbrokers will attract an MDR of 0.02%, capped at ₹300.

Zerodha and INDmoney have flagged the potential cost impact of the measure. Warning that brokers could incur charges on fund transfers without necessarily generating corresponding trading revenue, Zerodha cofounder and CEO Nithin Kamath called for the MDR on broking transactions to be capped at ₹5 or ₹10.

A petition was also filed in the Supreme Court yesterday challenging the Centre’s framework. It contended that merchants could pass on the additional cost to consumers indirectly by raising prices.

The government has repeatedly said consumers will not be charged a separate UPI fee and that merchants cannot levy a direct surcharge on customers. It expects the MDR revenue to support UPI infrastructure, cybersecurity, innovation, and customer service, along with a proposed fund for payment infrastructure and merchant onboarding in smaller centres.

New Revenue Stream For Fintechs

While merchant bodies and investment platforms have raised concerns, banks, payment companies, and TPAPs have largely welcomed the return of MDR, which has been a longstanding industry demand. 

Under the standard 0.4% MDR structure, the merchant will pay the acquiring bank, which will transfer 0.28% to the issuing bank as an interchange. The issuing bank will pay 0.12% to the payer-side payment service provider, which, in turn, will pay 0.08% to the UPI app provider.

The framework will open a new revenue stream for companies operating in the UPI ecosystem.

Following the MDR notification, PhonePe is looking to revive its IPO plans. The Walmart-backed fintech startup is eyeing a listing in February-March 2027, Inc42 reported yesterday.

Edited by Vinaykumar Rai

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