The UPI Shake-Up Begins

A customer scans a QR code at a neighbourhood shop, enters a passcode and the payment is done. Similarly, a wholesaler pays a supplier, friends split a dinner bill, and consumers buy groceries, all without handling cash.

Over the past decade, the QR code has quietly become one of the most visible symbols of Digital India. But India’s digital payments revolution is now entering a new phase.

From October 15, select high-value UPI payments will no longer be entirely free for merchants. Under the new framework, a 0.4% merchant discount rate (MDR) will apply to specified person-to-merchant UPI transactions above ₹2,000. The charge has been capped at ₹300 for transactions of ₹75,000 and above. The new framework has been introduced at a time when UPI has reached enormous scale. For context: UPI processed 24.51 Bn transactions worth ₹29.82 Lakh Cr in August alone.

This has created some uneasiness in the market, even as the government says around 96% of P2M UPI transactions will remain unaffected. According to the merchants Inc42 spoke with on the condition of ano nymity, the 0.4% MDR charge may not sound like much, but repeated across hundreds of transactions, it can take a visible bite out of margins. 

And that’s where UPI’s next chapter gets complicated. 

After years of encouraging businesses and consumers to embrace digital payments, the ecosystem is now being asked to pay up for the infrastructure. Consequently, FMCG distributors and retailers have raised concerns about the impact on their margins, while petrol pump dealers in several states have threatened to stop accepting UPI payments above ₹2,000 unless they are exempted. 

Fuel stations in Mumbai have sought a waiver, while dealers in Maharashtra are deliberating whether to accept UPI at pumps. Similarly, traders in Ghaziabad have already put up notices saying “UPI Payment Will Not Be Accepted” for transactions affected by the new MDR framework.

The merchant backlash is only one side of the UPI story, where scale, rather than monetisation, has been the protagonist for a decade. Now, with visible pushback from merchants, could UPI’s monetisation push once again change how Indians choose to pay?

Payments Were Never Truly Free 

Debit cards already carry an MDR for merchants, with RBI’s framework allowing charges of up to 0.9% for certain merchants with annual turnover above ₹20 lakh, while the ceiling for QR-code-based card acceptance is 0.8%. Credit cards typically carry higher merchant charges, given the interchange and other fees involved in the card ecosystem. Even cash comes with a cost. Once customers exhaust their free ATM withdrawal limit, banks charge around ₹23 per transaction. 

But UPI made that cost almost invisible.

For consumers, scanning a QR code has felt like the closest thing to a free payment system. There is no fee staring back at you at the point of purchase, no cash to count and no need to think about the machinery sitting behind the transaction. 

That simplicity has been central to UPI’s rapid adoption. The network has operated under a zero-MDR regime for a long time, with banks and other ecosystem participants supported through incentives and other mechanisms. And now it is time to monetise the endeavour, with some believing 0.4% MDR is just the beginning.   

“This is not going to end at just 40 basis points,” said a Mumbai-based fintech founder, arguing that other participants in the payments ecosystem could eventually seek a larger share.

According to him, the costs around processing, fraud prevention, technology and compliance are likely to grow as UPI moves into higher-value commerce and increasingly complex financial use cases. “This could solidify the case for more participants seeking revenue from the network.”

Who Wins In The MDR Tug-Of-War?

The return of MDR creates a direct, transaction-linked revenue pool around UPI, but the question is: who gets paid?

The biggest beneficiaries may not be the payment apps consumers see on their phones, but the banks and infrastructure providers that sit underneath each transaction.

Citi estimates that the new framework could create an annual revenue pool of around ₹16,000-₹17,000 Cr. Of this, roughly 60% could accrue to banks and UPI handles, 25% to UPI app providers, and the remaining 15% to non-bank payment aggregators. 

Goldman Sachs has a somewhat different estimate. It expects 50% of the pool to go to issuing banks and PSPs, 20% to third-party application providers and 30% to acquiring banks. Across brokerages, the overall opportunity is estimated at ₹15,000-₹20,600 Cr annually.

Within banking, the gains could be particularly meaningful for lenders that process a large share of UPI transactions or have merchants doing higher-value business. Citi estimates that Yes Bank could see a 6-12% increase in gross profit from the new MDR, while Bank of Baroda, Punjab National Bank and IndusInd Bank could see around a 2% PBT benefit each. Axis Bank, SBI and Federal Bank could see a 1-2% benefit.

Then the second layer of beneficiaries is the payment apps. 

Even a minority share of the MDR pool could create a significant new revenue stream at their existing scale, particularly if they capture a larger share of higher-value merchant transactions.

Payment aggregators and other fintech infrastructure providers form another layer of beneficiaries. They could capture part of the MDR pool for providing merchant acceptance, payment processing and related infrastructure. But their share is expected to be smaller than banks and UPI application providers. 

Citi’s estimate puts non-bank payment aggregators at around 15% of the overall pool. 

Back To Cards Or Cash?

There is another side to the equation. The new MDR regime could make the economics of card networks, such as Visa and Mastercard, relatively more attractive, particularly for higher-value transactions where merchants may reconsider their payment options. 

That makes enforcement of the no-pass-through rule even more important, as any increase in the effective cost of accepting UPI could prompt merchants to explore alternative payment rails.

“It’s very difficult to keep saying, ‘Make sure that they do not pass on the charge.’ But how do you enforce that? How can you stop an ecommerce platform from passing on the charge? To check that at a granular level may be a nightmare and could end up being more expensive for the industry just to comply,” said Sharat Chandra, founder of EmpowerEdge Venture.

He also pointed to the difficulty regulators have faced in monitoring practices such as dark patterns on commerce and consumer platforms. In his view, tracking whether MDR is being passed on could present a similar challenge.

But the bigger risk to UPI will be when merchants decide to use another payment method.

“More merchants will get creative and try to see how they can circumvent these channels. Cash will bounce back into the equation,” Chandra said.

He took an example of monthly groceries and daily essentials that can easily cross the ₹4,000-₹5,000 mark. “Until now, UPI had them covered. But now, it is going to pinch price-sensitive people.”

Meanwhile, a LocalCircles survey found that 53% of surveyed UPI users said they would move away from UPI for payments above ₹3,000 if merchants passed the MDR on to them. Among these respondents, 27% said they would shift to credit cards, 14% to debit cards and 12% to cash or bank transfers.

There could also be workarounds. Take a ₹5,000 purchase. In theory, it could be split into multiple smaller UPI transactions to stay below the threshold. Whether this becomes common will depend on how banks, payment aggregators and NPCI monitor transactions and enforce the new framework.

Cash does not carry an MDR at the point of acceptance. It does have handling, reconciliation, security and cash management costs. These leave UPI with a tricky balancing act, and the last thing UPI needs is to make people reach for their wallets again.

[Edited by Shishir Parsher]

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