Key Takeaways:
- The UPI MDR proposal may increase costs for merchants accepting digital payments.
- UPI handles 23 billion monthly transactions worth ₹30 lakh crore
- Zero MDR policy review linked to rising infrastructure and service costs
The Union Ministry of Finance has proposed amendments to the Payment and Settlement Systems Act, 2007, that could enable merchant discount rates on transactions conducted through the Unified Payments Interface. The proposal includes removing the zero MDR provision under Section 10A, which currently prevents banks and payment service providers from charging fees on digital transactions made via UPI and RuPay debit cards.
What MDR Means For Merchants
Merchant discount rate is a fee paid by businesses to banks and payment service providers for processing digital transactions. The fee is regulated by the Reserve Bank of India. Prior to 2020, MDR applied to most digital payments, but it was reduced to 0% for UPI and RuPay debit card transactions to accelerate adoption across India.
In a typical payment scenario involving cards, a portion of the transaction value is deducted as MDR and distributed among issuing banks, acquiring banks, and payment networks. Under the current UPI framework, merchants receive the full transaction amount without any deduction, although the UPI MDR proposal could change this structure for certain transactions.
If the UPI MDR proposal is implemented, MDR could be reintroduced for specific categories of merchants or transaction values. While final rates have not yet been notified, industry submissions have suggested an MDR of around 0.3% for UPI transactions involving large merchants. This would introduce a direct cost component for businesses that rely heavily on UPI for collections.
Scale Of UPI And Cost Pressures
India’s UPI MDR proposal comes as the payment platform now accounts for about 88% of all digital transactions in India. The platform processes more than 23 billion transactions every month, with a total value of approximately ₹30 lakh crore. This scale has made UPI a central component of India’s digital payments ecosystem.
However, the growth has also increased infrastructure and operational demands on banks and payment service providers. Estimates indicate that maintaining and expanding UPI services requires around ₹10,000 crore annually. Existing government incentives to offset these costs are about ₹1,500 crore.
The UPI MDR proposal also reflects expectations of continued expansion, with an additional 600 million users expected to join the platform. Monthly transaction volumes are projected to rise to between 100 billion and 150 billion in the coming years, increasing the need for sustained investment in systems, security, and processing capacity.
Industry bodies such as the Payments Council of India have highlighted concerns about the long-term financial sustainability of the zero MDR framework. They have recommended reintroducing MDR to support continued investment in the ecosystem.
For business owners and entrepreneurs, the UPI MDR proposal signals a potential shift in cost structures linked to digital payments. While there is no proposal to charge customers directly for UPI transactions, merchants may need to absorb MDR as part of operating expenses, depending on the final structure and thresholds defined.
The final details, including applicable MDR rates and merchant categories, are expected to be clarified after the amendment process is completed.
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