UPI's Zero-MDR
Era May Be Nearing a Turning Point
Merchant
Discount Rate, or MDR, is the fee a merchant pays each time a customer pays
digitally, whether by card or through a payment app. Banks and payment
companies charge it to cover the cost of running the systems that move that
money instantly and securely. Debit and credit cards have always carried this
fee. UPI never has. Since January 2020, the government made UPI transactions
free for merchants, and that decision is a big part of why India's real time
payments system grew into the largest in the world by transaction volume.
That zero MDR
era may be nearing a turning point. The Lok Sabha recently passed the Taxation
and Other Laws Amendment Bill, 2026, creating a legal framework that would
allow the government to decide which digital payment methods remain exempt from
Merchant Discount Rate (MDR). Once the Bill becomes law, the government can
notify a negative list of payment modes that will continue to remain MDR-free,
while payment modes outside that list could become eligible for MDR if charges
are notified. The Finance Minister has already clarified that any such fee
would apply only to merchants and not to end users and that no final decision
has been taken yet.
Media reports
citing government sources suggest the levy under discussion could fall between
0.25% and 0.4%, likely applied to merchant transactions above ₹2,000. This
range hasn't been officially confirmed by the RBI or the Finance Ministry, so
it should be read as a reported estimate rather than a settled number, but it
gives a useful sense of scale for what's on the table.
Banks have
effectively run UPI's merchant side as a cost centre since 2020, absorbing
infrastructure and processing expenses without any fee to offset them, meaning
every merchant transaction processed has added to their costs without adding to
their revenue. Even the lower end of the reported range, 0.25% on transactions
above ₹2,000, could generate roughly ₹17,416 crore a year across the sector,
going by recent monthly transaction data. At the upper end of 0.4%, that figure
would scale to somewhere in the region of ₹27,800 crore. For banks with a
sizeable digital payments book, this would turn UPI from a volume heavy, margin
light business into one with a real fee income component attached.
Payment
aggregators and fintech platforms, the app layer merchants actually transact
through, are in much the same boat. An MDR in this range would let them start
recovering costs they've carried for years, though how much of that benefit
actually reaches them versus banks depends on how any fee eventually gets split
and that detail hasn't been worked out yet. If anything, this is the segment
most exposed to the outcome, since UPI volumes sit at the core of these
platforms' business models in a way they don't for larger, more diversified
banks.
Merchants sit
on the other side of this. One reported model would apply MDR only to
transactions above ₹2,000 made to businesses with annual turnover exceeding
₹1.5 crore, meaning smaller merchants below that threshold could stay exempt
altogether. If that structure holds, the real burden falls on larger,
high-turnover businesses rather than small shopkeepers and street vendors.
Industry bodies have raised a related concern, though: a
turnover cutoff draws a hard line where the underlying economics are actually
quite similar on both sides of it. A business just above ₹1.5 crore in turnover
isn't necessarily better cushioned or more profitable than one just below it.
Officials have said the fee itself would likely be small, but for businesses
already running on thin margins, even a small new recurring cost changes the
math in a way it simply wouldn't for a bigger retailer with more financial
cushion.
For retail
investors, the point isn't that MDR is coming, it's that this has stopped being
a purely hypothetical debate. A reported rate range now exists, even if
unconfirmed, giving banks and payment platforms a genuinely plausible path to
new fee income, while leaving merchants to absorb the other side of it. Nothing
is finalized, and the steering committee's decision is still pending, but the
range under discussion explains, in fairly concrete terms, why every part of
this ecosystem has real skin in the game.
By Srishti Mendiratta |
SEBI-Registered Research Analyst – INH000024295
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