UPI’s Monetisation Moment: Why MDR Is Back On The Table

For nearly six years, Unified Payments Interface (UPI) transactions in India have carried a zero-cost promise: no Merchant Discount Rate (MDR), no platform fee, no technology fee. 

That promise fuelled UPI’s rise from a niche payment rail to a system processing over 2,272 Cr transactions worth ₹28.92 lakh Cr in June alone — a poster child of India’s digital payments landscape.

However, UPI is also increasingly becoming the payments ecosystem’s biggest unresolved economic problem.

Recent reports suggest the Centre is weighing a targeted reintroduction of MDR not across the board, but on a narrow slice of high-value transactions by large merchants. 

Under the proposal, businesses with an annual turnover of ₹1 Cr to ₹1.5 Cr or more would attract an MDR of 0.05% to 0.07%, and only on UPI transactions above ₹2,000. 

Roughly 90% of merchants accepting UPI — the small and micro businesses that make up the bulk of India’s digital payments story — would remain untouched, according to the media reports and industry sources.

However, it is not the first time this idea has surfaced. 

The Payments Council of India has previously pushed for a 0.3% MDR on large-merchant UPI transactions, and the Parliamentary Standing Committee on Finance has recommended a phased reintroduction. 

The Finance Ministry, however, denied such plans as recently as last year, calling similar reports “baseless”. 

Yet the fact that the conversation keeps resurfacing  this time with specific turnover and ticket-size thresholds signals that the zero-MDR regime is under real strain.

Founders and CXOs engaged in discussions with the NPCI, RBI and finance ministry said that the implementation of MDR on select UPI transactions may in fact be only a few weeks away.

While no formal proposal has been announced, the discussions have reignited one of the payments industry’s oldest debates: who should pay for keeping India’s digital payments infrastructure running?

Interviews with payments aggregators, banks and fintech executives suggest the proposal is less about generating new revenue than about fixing a structural imbalance that has left large parts of the ecosystem operating without a viable monetisation model.

Why UPI’s Zero-MDR Model Broke

The math is straightforward once you see who is actually processing UPI payments.

According to Rajesh Londhe, CEO of payments aggregator startup, PhiCommerce, UPI now accounts for 60-65% of total transaction volume passing through payment aggregators. 

Under the current rules of the National Payments Corporation of India (NPCI), none of that volume can be charged due to no MDR, no platform fee, not even a basic technology fee.

Meanwhile, for aggregators whose core business is collecting payments on behalf of merchants, this turns the majority of their volume into a cost centre rather than a revenue line.

Government incentive schemes were designed to offset this gap, but Londhe points to a structural flaw.

“The government subsidy is typically routed to the acquiring bank, not to the payment aggregator or technology provider that actually built and operates the merchant-facing infrastructure. There are few entities like Paytm which had a bank earlier, a payment aggregator and third-party app within the same corporate entity and could avail a sizeable subsidy,” Londhe said.

The government’s RuPay and BHIM UPI incentive scheme peaked at ₹ 3,631 Cr  in FY24 

Every year since, the initial budgeted outlay has been cut sharply. It declined to ₹1,441 Cr in FY25, and further to just ₹437 Cr in FY26 — only to be revised upward mid-year after industry pushback.

Meanwhile, UPI volumes rose from 172.2 Bn in 2024 to 228.3 Bn in 2025.

Industry estimates on the other hand put the real subsidy requirement at ₹4,000-5,000 Cr  a year just to cover P2M transaction costs. 

So while the gap between ballooning UPI transactions volumes and shrinking subsidies is rising, the stakeholders say that the costs involved have become unsustainable. 

Banks face a parallel pressure, Londhe explains. 

“They are processing millions of UPI transactions daily and are under continuous pressure from the government and NPCI to keep scaling infrastructure capacity — without a proportionate return on that investment. That is the core banking-side case for reintroducing fees: infrastructure spend has kept climbing while the revenue model attached to it has stayed frozen at zero,” he added.

Raman Khanduja, cofounder and CEO at Mintoak, frames this as an ecosystem funding question rather than a pricing dispute. 

He points out that maintaining India’s real-time payments infrastructure, which includes  processing transactions, ensuring platform resilience, strengthening fraud prevention, managing disputes, and continuing to invest in innovation requires sustained capital from banks and other ecosystem participants. A permanent zero-MDR framework is difficult to sustain as transaction volumes continue to grow.

Khanduja adds that the debate should move past whether MDR should exist at all, and focus instead on how to preserve merchant affordability while building a framework sustainable enough to keep India’s payments infrastructure competitive over the next decade.

Who Actually Gains? Banks And PAs, Not Necessarily Fintech Apps

A reintroduced MDR would not distribute value evenly across the ecosystem according to the industry stakeholders Inc42 spoke to for this story.

Enterprise-focused payment aggregators stand to benefit the most directly where the client base sits over and above the annual turnover of ₹1 Cr. According to the experts, they stand to monetise a majority of their transaction volume that currently generates no revenue at all. 

Banks also are expected to  see improved returns on the infrastructure they have been scaling under regulatory pressure.

Consumer-facing third-party apps (TPAPs) aka the UPI apps people use to pay may not actually be the highest beneficiaries of the MDR. This puts PhonePe, Google Pay, Paytm, Amazon Pay, Navi, super.money and others at a disadvantage.

Phi Commerce CEO believes these companies already generate revenue primarily through interchange fees and other roles within the payment chain, rather than depending on consumer-facing UPI transaction fees. 

Their business models are unlikely to shift meaningfully either way, MDR or no MDR. 

“In other words, the TPAP layer is largely a bystander in this particular fee debate. The money moves at the aggregator and bank layer, not the app layer,” he added.

Reeju Datta, cofounder of Cashfree Payments, told Inc42 that reintroducing charges would let a wider set of participants, including smaller tech-first players who currently cannot compete on unit economics with zero fee income, operate sustainably and continue innovating in merchant acquiring .

How The Fee Could Actually Be Charged 

The structural design of the proposed MDR has been deliberately linked to turnover and ticket-size to minimise visible friction on both the merchant and end-consumer sides.

NPCI data shows the average ticket size for person-to-merchant (P2M) UPI transactions is roughly ₹600 over the past 18 months. This implies that the threshold of charging MDR on UPI above ₹2,000 transaction would touch a small minority of transactions even for large, high-turnover merchants.

Industry sources told us since the fee is deducted at the backend between the merchant and the acquiring infrastructure, the transaction experience for the customer does not change at all as there is no additional prompt, no visible surcharge or friction at the point of payment

But what about the large merchants? Wouldn’t reintroduction of MDR put additional cost burden on large merchants?

Mintoak’s Khanduja said that for larger merchants, a modest and calibrated MDR is unlikely to alter payment acceptance decisions in any meaningful way particularly when set against the leverage of a more resilient, better-funded payments infrastructure. 

“A calibrated MDR framework, if introduced, need not create significant friction for UPI adoption. UPI has become deeply embedded in consumer behaviour because of its speed, convenience and ubiquity,” he added.

Phi Commerce’s Londhe draws a parallel: “Card payments in India have long carried an MDR of roughly 1.8%. Even at the higher end of the numbers being discussed for UPI, whether the 0.05-0.07% or even 0.3% to 0.5% of each transaction value, this sits well below what merchants already absorb on card acceptance.” 

His argument is that digital payment collection is a legitimate cost of doing business, and not different in principle from the cost merchants already accept for card infrastructure.

Essentially, the bet is that the market is likely to normalise around the new rules within a month or two of any rollout, even if there is initial resistance from merchants used to a decade of free UPI processing.

The Real Bottleneck: Verifying Turnover, Not Merchant Pushback

The bigger practical challenge for stakeholders however lies with implementation of charging a merchant turnover-linked MDR.

For instance, applying an MDR fee only to businesses above a ₹1-1.5 Cr  annual turnover threshold requires someone in the chain — a payment aggregator, an acquiring bank, or NPCI itself — to actually verify that turnover figure in real time, at the point of onboarding and on an ongoing basis.

Londhe, who has been part of industry discussions on this, says that the verification problem is not trivial. 

“Turnover self-declared by merchants is prone to manipulation as there is no clean, standardised mechanism today for payment aggregators or acquiring banks to independently confirm a merchant’s annual revenue at the time of a transaction,” he added.

There also seems to be regulatory ambiguity on who will oversee the merchant verifications and enforcing compliance part.

This is arguably the single biggest execution risk in the entire proposal, according to the people aware of the discussions between industry stakeholders and the regulators.

There are also concerns on whether the large merchants would charge customers extra for paying through UPI.

Industry executives argue that payment acceptance should remain a business expense rather than a consumer surcharge.

Founders believe regulators should explicitly prohibit merchants from passing MDR on to customers by incorporating such restrictions into payment aggregator agreements.

The Payments Council of India’s past representations to the government have made a similar point about MDR being a merchant cost, not a pass-through charge

Even as the government is yet to announce a formal order on charging MDR on large UPI transactions the industry buzz suggests that the conversations have shifted from a stern no to accommodative stance. 

The next phase of digital payments cannot be driven by transaction growth alone. It must also ensure that the institutions building and maintaining this infrastructure have sustainable business models. Otherwise, there is a risk that investment in innovation, merchant services, security, and customer experience could gradually slow down.

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