UPI and MDR: Can selective charges sustain India’s digital payments ecosystem?

As Unified Payments Interface (UPI) completes a decade, the focus is shifting from rapid adoption to the long-term sustainability of the digital payments network. Experts argue that selective merchant discount rate (MDR) charges could help fund the technology and infrastructure required to support UPI’s next phase of growth, while preserving its low-cost model for consumers and small merchants.

MDR, or Merchant Discount Rate, is a fee charged to merchants for accepting digital payments. It is typically paid by the merchant and shared among banks, payment service providers and other participants involved in processing the transaction. The fee helps cover the costs of maintaining payment infrastructure, processing transactions and providing related services. For digital payment systems, MDR can serve as a source of revenue for the entities that facilitate transactions. The rate may vary depending on the payment method, transaction type, merchant category and applicable regulations.

Dinesh Khara, former Chairman of SBI, said the sheer volume of low-value transactions is putting pressure on the system and argued that MDR could help strengthen the payment infrastructure.

“A very significant number of transactions are up to ₹500. So, naturally, the volumes which have gone up actually lead to the pressure on the system,” Khara told CNBC TV-18.

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He, however, stopped short of supporting MDR across all transactions, suggesting that low-value payments may not need to attract a charge. “That will ensure equity. That will ensure that the players who are already there in the system can invest in the technology,” he said.

PineLabs CEO Amrish Rau also favoured a differentiated approach. Consumers, he said, should not be charged for UPI, while small merchants should remain protected from additional costs. Large merchants operating at scale, however, could contribute towards maintaining the ecosystem.

Rau said a fee would not necessarily discourage merchants from using UPI. “I have never seen a merchant refuse a commerce transaction because of 1% being charged on it,” he told CNBC TV18.

He suggested an MDR of around 25-35 basis points as a possible range, arguing that the economics would become more meaningful as UPI expands into smaller cities.

Scaling UPI beyond major cities

The challenge is no longer simply increasing UPI adoption, but building an ecosystem capable of supporting its next leg of expansion. Rau said banks, fintech companies and venture capital investors have already invested nearly ₹50,000 crore in developing the UPI ecosystem.

“For us to scale from this 30% number to 80% number, I think we are going to have to look at these mechanics in a slightly different way,” Rau said.

The scale has also enabled businesses that did not exist a decade ago. Rau said fintech companies have built numerous business models on top of UPI. “I can rattle off literally 50 examples where new business models have got created,” he said.

Khara said UPI has also helped formalise smaller businesses by giving banks greater visibility into their cash flows, potentially making credit easier to access.

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“With the help of UPI, since we have got very clear visibility of the credit history or maybe the transaction volumes of the SMEs and also the small businesses, it's very easy to lend to such businesses,” he said.

He expects digital lending against UPI-linked cash flows to gain traction as lenders use transaction data to identify cash-flow gaps and provide digital financing.

From payment rail to economic infrastructure

For AP Hota, former CEO of NPCI, the economics of UPI have always been an important consideration. He said the government removed MDR during the COVID period as UPI became critical when physical contact declined and e-commerce surged.

“Economics was very much in the mind,” Hota said, adding that UPI is not entirely free because NPCI and some payment players continue to receive compensation, while banks and certain intermediaries have not been adequately compensated.

Hota backed MDR for selected categories rather than across all transactions. He also said banks need to invest more in UPI because the shift from cash to digital payments ultimately makes banking more efficient.

Khara pointed to UPI’s wider economic impact, noting that e-commerce during COVID was heavily dependent on the payment rail and that currency in circulation could have risen significantly more without UPI.

After a decade of rapid adoption, UPI’s next chapter is therefore likely to centre on making its scale economically and technologically sustainable, without weakening the affordability and inclusiveness that made it ubiquitous.

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