BT EXPLAINER | Banks or PhonePe, Patym and Google Pay — Who stands to benefit the most from UPI MDR?

Free UPI payments may soon be a thing of the past. The Finance Ministry on Tuesday tabled a bill in Parliament — the Payment and Settlement Systems (Amendment) Bill, 2027 — that could bring back Merchant Discount Rate (MDR) charges on digital payments, including UPI. For years, zero-MDR has been the government's biggest pitch to get Indians off cash, driving UPI to over a billion transactions a month. Now, that free ride could be coming to an end. If passed, the bill could change how you pay for your online shopping orders and here's who could benefit from this. 

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Why is the government considering bringing back MDR on UPI?

The government is bringing back MDR because the zero-MDR mandate has rendered the expansion of UPI ecosystem "financially unsustainable" for banks and payment service providers (PSPs), according to the Parliamentary Standing Committee on Finance. 

What changes does the Payment and Settlement Systems (Amendment) Bill, 2027 bring?

Some changes proposed under the Payment and Settlement Systems (Amendment) Bill, 2027 include: 

• Blanket exemption to be removed: The bill, if passed, would scrap the rigid link that automatically banned bank and processor fees on select digital payment modes. 
• Government notification power: It gives the Centre the power to modify which modes of payment enjoy zero MDR via official notification instead of passing new laws. 
• Focus on high-value and large merchants: At present, the Bill largely targets transactions above ₹2,000 made to large commercial entities instead of daily retail purchases. 
• Consumer protection: Person-to-person (P2P) transfers and routine payments to small shopkeepers are expected to remain completely free. 
• No immediate charges set: The Bill does not comprise a specific fee, rate, or timeline; it only creates the legal space to implement a sustainable revenue model later 

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What is the UPI MDR charge and who has to pay it?

MDR is a fee paid by merchants to banks/payment providers, not directly by customers. Businesses may either absorb the cost or potentially pass some of it on to customers through pricing. 

The fee is expected to kick in only for transactions above ₹2,000. It is also targeted at corporate entities and e-commerce platforms such as Amazon and Flipkart that breach specific business turnover limits, like businesses with turnovers over ₹1.5 crore or ₹150 crore.

Will UPI payments at local shops, tea stalls and grocery stores remain free?

Sending money to friends, family or any personal bank account remains completely exempt. Scanning QR codes at local tea stalls, grocery shops, vegetable vendors, or auto-rickshaws will continue to carry 0% MDR. 

What is the current UPI MDR structure?

Final rules, fees, and implementation timeline have not been announced yet. At present, the UPI transaction fees vary based on the mode of payment used. 

Which banks could benefit the most if UPI MDR returns?

The reintroduction of MDR is expected to benefit banks such as SBI, Bank of Baroda, HDFC Bank, Union Bank, and Punjab National Bank. SBI, in particular, could earn a windfall of ₹3,000 crore annually if MDR is introduced.

Other large public sector banks (PSBs) may collectively earn ~₹700 crore, whereas private banks and payment processors would also benefit from fresh fee income. Bank of Baroda and HDFC Bank could earn around ₹800 crore, whereas Union Bank and Punjab National Bank are likely to earn around ₹700 crore.

How will PhonePe, Google Pay and Paytm benefit from UPI MDR?

It is also expected to benefit payment companies like PhonePe, Google Pay and Paytm, which earn little from merchant UPI transactions at present. According to a report in Moneycontrol, PhonePe and Paytm could earn roughly ₹700 crore annually from MDR while Google Pay could mint around ₹500 crore. 

How big could the UPI MDR market become by 2028?

Moreover, MDR on UPI could create a revenue opportunity worth ₹5,000-₹10,000 crore by 2028, according to Jefferies. An MDR of 15-30 basis points (bps) on UPI transactions above ₹2,000 could generate ₹5,000-₹10,000 crore by FY2027-28. 

“We feel the industry is likely to be more disciplined about retaining the MDR and investing in expansion and improving profitability, rather than eroding it through competitive pricing,” Jefferies said in a note on Tuesday.