Could MDR revive credit and debit cards? Survey suggests higher-value UPI payments may decline

The debate over reintroducing the Merchant Discount Rate (MDR) on certain Unified Payments Interface (UPI) transactions has reignited questions about whether credit and debit cards could regain ground in India's digital payments landscape. A new LocalCircles survey suggests that if large merchants pass on MDR charges to customers for UPI payments above ₹3,000, a significant number of users may switch to cards or other payment methods instead.

Credit cards emerge as the biggest alternative

According to the survey, more than five in 10 UPI users are likely to move away from the platform for higher-value transactions if an MDR is levied and recovered from consumers. Among respondents, 27% said they would switch to credit cards for most transactions above ₹3,000, while 14% would prefer debit cards. Another 12% would shift to cash or bank transfers, taking the combined migration away from UPI to 53%. By contrast, only 12% said they would continue using UPI even if they had to bear the fee, while 18% said they would continue using UPI only if the merchant absorbed the cost.

The findings indicate that if merchants pass on MDR to customers, card issuers could stand to benefit, with credit cards emerging as the preferred alternative for higher-value purchases.

Users unwilling to absorb additional charges

The survey also found that if merchants begin recovering the transaction fee from customers, nearly half of respondents would avoid making purchases above ₹3,000 through UPI altogether. Around 21% said they would switch to another digital payment method that does not levy additional charges, while 14% would stop shopping with merchants that recover such a fee whenever alternatives are available. Another 8% said they would ask merchants to waive or absorb the charge, and only 2% said they would simply pay the fee and continue using UPI.

The survey, based on responses from over 45,000 UPI users across 322 districts, underscores how strongly consumers associate UPI with zero-cost payments, particularly for high-value transactions.

What the proposed amendment changes

The survey comes amid the Finance Ministry's proposal to amend the Payment and Settlement Systems (PSS) Act, 2007. Importantly, the amendment does not introduce MDR on UPI transactions or impose any immediate charges.

Instead, it seeks to amend Section 10A of the Act, replacing the current blanket exemption with a framework that would allow the Central Government to decide through future notifications which digital payment modes remain exempt from charges and which could attract MDR.

Legal experts describe the proposal as an enabling provision rather than a policy decision. According to Probir Roy Chowdhury, Partner at JSA, removing the statutory restriction would give the government the flexibility to prescribe MDR on UPI transactions at a later stage, if it chooses. Even if Parliament passes the amendment, separate notifications would still be required to specify whether charges will apply, the payment modes covered, the types of transactions and the applicable MDR rates.

Rising UPI volumes fuel sustainability debate

The proposed legislative change comes as UPI continues to record rapid growth. In July, the platform processed 23.66 billion transactions worth ₹29.88 lakh crore, increasing the cost of maintaining payment infrastructure, cybersecurity and technology for banks and payment service providers.

Industry participants have argued that the government incentive scheme introduced after MDR was removed in 2020 does not fully compensate for these costs. While analysts believe any future MDR, if introduced, is more likely to be restricted to higher-value merchant transactions while keeping small merchants and consumers protected, the government has not announced any such proposal.