MDR on UPI: Impact could be much wider, affecting even small street vendors, says ISB study
A study by the Indian School of Business found that nearly 70% of surveyed street vendors made supplier payments exceeding Rs 2,000 at a time, bringing these transactions within the proposed MDR framework. Vendors would be likely to pass on any additional charges for these wholesale payments or switch back to cash.
- Nov 4, 2026,
- Updated Nov 4, 2026 7:35 PM IST
In September 2026, it was announced that a merchant discount rate (MDR) of 0.40% would be charged on Unified Payments Interface (UPI) person-to-merchant (P2M) transactions above Rs 2,000. The rollout was initially scheduled for October 15, but the National Payment Corporation of India (NPCI) later postponed it until after Diwali. Supporters argue that the MDR would make the homegrown payment system sustainable, while leaving almost 96% of P2M transactions free of the charge.
However, a study by the Indian School of Business (ISB) suggests that the impact of MDR could be much wider, affecting even small street vendors.
The study was based on a survey of 722 street vendors across 14 states and union territories.
Nearly 70% of surveyed vendors make supplier payments exceeding Rs 2,000 at a time. Almost all of these vendors indicated that they could switch to cash if suppliers imposed an additional charge on UPI payments, the study’s authors said.
According to the study, 10.4% of vendors reported that suppliers had asked them to pay additional charges for UPI payments in the ten days preceding the survey. “Street vendors buy goods from their suppliers in bulk. If a vendor is purchasing goods worth Rs 15,000 from the supplier, he will have to pay around Rs 60 MDR. We may think that it is minimal. However, assume that the same vendor is making a net margin of Rs 1,000 on a daily basis. This additional cost will translate to roughly around 6 percentage point tax on the profit,” explained Anand Sudhakaran, the co-author of the study.
“So, even though, this 0.4% MDR is a minimal amount, in reality once it is accounted to their net margin, this is going to translate into a larger amount,” said Sudhakaran.
The findings suggest that additional procurement costs could influence retail pricing decisions.
“Right now, all the discussions are revolving around only the last level of transactions, which are customer to business. Then there is a business-to-business transaction that is not being accounted for in any of these discussions,” Sudhakaran said.
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While the rules explicitly state that businesses, not customers, must bear the MDR charge, vendors facing higher costs for wholesale procurement may look for ways to pass them on to customers, the authors noted.
The study called for caution in implementing the proposed MDR framework. Exemptions based on transaction size may protect small merchants at the retail level, but they do not necessarily account for wholesale procurement costs, the authors pointed out. If suppliers pass on these charges, vendors could face further pressure on their already limited margins, making cash a more attractive payment option.
Professor Prasanna Tantri, executive director of the Centre for Analytical Finance at ISB, said the arguments put forward by the industry and the government on MDR need closer examination.
“The problem with the current accounting is that it only shows the cost and not the benefits. For instance, lot of these people get data because of UPI. Now that data is a public good provided by NPCI. So, when you count cost, you cannot leave out that benefit from that,” he opined.
For instance, UPI payment data has helped fintechs evaluate vendors based on their cash flows.
“We need proper accounting. If we know that this is not sustainable, then of course an MDR should be charged,” he stated.
The ISB survey also found that UPI adoption varied across city tiers: 82% of vendors in Tier 1 cities accepted digital payments, compared with 66% in Tier 2 and 64% in Tier 3 cities. Awareness of the proposed charges also differed: 66% of Tier 1 vendors had heard about them, compared with 55% in Tier 2 and 47% in Tier 3.
In September 2026, it was announced that a merchant discount rate (MDR) of 0.40% would be charged on Unified Payments Interface (UPI) person-to-merchant (P2M) transactions above Rs 2,000. The rollout was initially scheduled for October 15, but the National Payment Corporation of India (NPCI) later postponed it until after Diwali. Supporters argue that the MDR would make the homegrown payment system sustainable, while leaving almost 96% of P2M transactions free of the charge.
However, a study by the Indian School of Business (ISB) suggests that the impact of MDR could be much wider, affecting even small street vendors.
The study was based on a survey of 722 street vendors across 14 states and union territories.
Nearly 70% of surveyed vendors make supplier payments exceeding Rs 2,000 at a time. Almost all of these vendors indicated that they could switch to cash if suppliers imposed an additional charge on UPI payments, the study’s authors said.
According to the study, 10.4% of vendors reported that suppliers had asked them to pay additional charges for UPI payments in the ten days preceding the survey. “Street vendors buy goods from their suppliers in bulk. If a vendor is purchasing goods worth Rs 15,000 from the supplier, he will have to pay around Rs 60 MDR. We may think that it is minimal. However, assume that the same vendor is making a net margin of Rs 1,000 on a daily basis. This additional cost will translate to roughly around 6 percentage point tax on the profit,” explained Anand Sudhakaran, the co-author of the study.
“So, even though, this 0.4% MDR is a minimal amount, in reality once it is accounted to their net margin, this is going to translate into a larger amount,” said Sudhakaran.
The findings suggest that additional procurement costs could influence retail pricing decisions.
“Right now, all the discussions are revolving around only the last level of transactions, which are customer to business. Then there is a business-to-business transaction that is not being accounted for in any of these discussions,” Sudhakaran said.
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While the rules explicitly state that businesses, not customers, must bear the MDR charge, vendors facing higher costs for wholesale procurement may look for ways to pass them on to customers, the authors noted.
The study called for caution in implementing the proposed MDR framework. Exemptions based on transaction size may protect small merchants at the retail level, but they do not necessarily account for wholesale procurement costs, the authors pointed out. If suppliers pass on these charges, vendors could face further pressure on their already limited margins, making cash a more attractive payment option.
Professor Prasanna Tantri, executive director of the Centre for Analytical Finance at ISB, said the arguments put forward by the industry and the government on MDR need closer examination.
“The problem with the current accounting is that it only shows the cost and not the benefits. For instance, lot of these people get data because of UPI. Now that data is a public good provided by NPCI. So, when you count cost, you cannot leave out that benefit from that,” he opined.
For instance, UPI payment data has helped fintechs evaluate vendors based on their cash flows.
“We need proper accounting. If we know that this is not sustainable, then of course an MDR should be charged,” he stated.
The ISB survey also found that UPI adoption varied across city tiers: 82% of vendors in Tier 1 cities accepted digital payments, compared with 66% in Tier 2 and 64% in Tier 3 cities. Awareness of the proposed charges also differed: 66% of Tier 1 vendors had heard about them, compared with 55% in Tier 2 and 47% in Tier 3.