UPI MDR May Be Set at 40 Bps; Banks Likely to Grab the Largest Share

What's the news#

According to a recent report, the finance ministry is preparing to notify a framework that would levy a merchant discount rate on select UPI payments. The proposed rate is said to be around 40 basis points, which translates to 0.40 % of the transaction value. This marks a shift from the current zero‑MDR environment that has been in place since UPI’s launch. The report adds that the decision is still under discussion and the final percentage could be tweaked before the official notification.

Details#

MDR is the fee paid by merchants to the payment ecosystem for processing a transaction. In the UPI context, the fee is usually split among the acquiring bank, the issuing bank, the payment service provider and the NPCI. Under the proposed 40 bps model, sources suggest that the acquiring bank could take the biggest slice, possibly around 15‑20 bps, with the issuing bank receiving a similar amount. The remainder would go to the PSPs and NPCI to cover technology and settlement costs. The exact split has not been finalized, but the emphasis on banks gaining the largest share reflects their role in providing the underlying settlement infrastructure.

Industry observers note that the proposed MDR would apply only to certain categories of transactions, such as merchant purchases and bill payments, while peer‑to‑peer transfers and government subsidy disbursements might remain exempt. The rationale behind carving out exemptions is to protect low‑value and socially sensitive flows from any additional cost burden. The framework is expected to include a clear definition of which transaction types fall under the MDR ambit and which are excluded.

India impact#

For merchants, especially small traders, an additional cost of 0.40 % could affect pricing decisions, though many argue that the absolute impact remains modest compared to card‑based MDR which often exceeds 1 %. Consumers are unlikely to see a direct change because merchants usually absorb the fee, but some may pass on a tiny surcharge in price‑sensitive segments. Banks stand to gain a new revenue stream that could supplement declining interest margins. Fintech companies that rely heavily on UPI for low‑cost transactions may need to revisit their pricing models or seek volume‑based discounts from banks. Overall, the move is viewed as an attempt to fund the growing UPI network without burdening end users.

Economic analysts suggest that the introduction of a modest MDR could encourage banks to invest more in UPI‑related technology, such as upgraded settlement systems and enhanced fraud‑prevention tools. This, in turn, could improve the reliability and speed of digital payments across the country. At the same time, policymakers are mindful of keeping the fee low enough to preserve the competitive advantage that UPI enjoys over other payment instruments.

Use cases#

Consider a neighborhood kirana store that processes ₹50,000 worth of UPI sales each month. At 40 bps, the MDR would amount to ₹200 per month, a figure that many small owners consider manageable. An e‑commerce platform handling ₹10 crore in monthly UPI volume would see a MDR outflow of ₹4 lakhs, which could be negotiated down through volume incentives. For utility bill payments, where transaction sizes are often low, the absolute fee remains in the paise range, making the impact negligible. These examples illustrate how the proposed rate could be absorbed across different scales of operation.

In the healthcare sector, clinics that collect patient fees via UPI could see a modest increase in operational costs. However, given the high frequency of low‑value transactions, the overall effect is expected to be limited. Similarly, educational institutions receiving tuition payments through UPI would experience a minor adjustment in their finance departments, with the cost likely being absorbed into existing administrative budgets.

Honest take#

Introducing an MDR on UPI is a pragmatic step toward ensuring the long‑term health of the payment rails. The zero‑MDR model drove massive adoption but left the ecosystem dependent on subsidies and indirect revenue. A modest 40 bps charge, with banks taking the lead share, aligns incentives: banks earn for providing settlement security, while PSPs and NPCI retain enough to maintain technology upgrades. The key will be transparency in how the fee is distributed and ensuring that small merchants are not disproportionately affected. If the framework is crafted with thresholds or tiered rates, UPI can continue its growth trajectory while becoming financially self‑sufficient.

Looking ahead, the success of this initiative will depend on clear communication from regulators, timely implementation of the notified framework, and active participation from all stakeholders. Continuous monitoring of the impact on merchant behaviour and consumer sentiment will be essential to make any necessary adjustments without undermining the core objective of affordable digital payments for all.