UPI should remain free: Expert on why MDR could push merchants and consumers back to cash

Unified Payments Interface (UPI) should remain free for merchants and consumers, and the digital payments system should instead be funded from the savings it generates for the government and banks, R S Sharma, former Director General and Mission Director of the Unique Identification Authority of India (UIDAI) and former Chairman of the Open Network for Digital Commerce (ONDC), has argued.

In an Indian Express editorial, Sharma said introducing a Merchant Discount Rate (MDR) on UPI could undermine one of the key advantages of India’s digital payments ecosystem and potentially push merchants and consumers back towards cash.

Why MDR does not fit UPI

The issue has gained relevance after Parliament passed the Taxation Laws (Amendment) Bill, 2026, which rewrote Section 10A of the Payment and Settlement Systems Act. While the amendment does not currently impose a charge on BHIM-UPI or RuPay, it removes the earlier enabling restriction and allows the government to notify payment modes that could carry a charge in future.

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Sharma argued that MDR is a legacy of the card-payment system and does not fit the economics of UPI. Card payments involve issuers, acquirers and networks, as well as costs associated with physical cards, terminals and credit risk. UPI, by contrast, allows funds to move directly between bank accounts through a common protocol, with transactions settled almost instantly.

Even a small charge is significant

The scale of UPI also makes even a small transaction charge significant. Sharma noted that UPI processed more than 24,000 crore transactions in FY2025-26, worth around ₹314 lakh crore. The average transaction was about ₹1,300, while 86% of merchant payments were below ₹500.

This means an MDR could have a disproportionate impact on small-value transactions and merchants. Sharma estimated that even a 0.3% charge on merchant payments could cost the retail economy around ₹27,000 crore annually.

He warned that merchants could pass these costs on to consumers, while consumers facing additional charges could choose cash instead. In his view, telling consumers that digital payments are now more expensive could reverse some of the behavioural shift that has helped UPI expand rapidly.

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Digital payments

Sharma also highlighted the savings created by digital payments. The Reserve Bank of India spends around ₹5,000-6,400 crore annually on printing currency notes, apart from the costs of storing and moving cash.

Banks, too, save money because digital transactions reduce the need for cash handling and physical banking infrastructure. Sharma’s argument is that these savings should be considered when determining how UPI infrastructure is funded.

Fund UPI from the savings it creates

His alternative is for the government to use these savings to support UPI through a transparent, formula-based mechanism rather than recovering the cost from merchants and consumers through MDR.

The argument is that UPI’s zero-cost model has helped make digital payments accessible across India, including for small merchants and low-value transactions. Introducing a fee could weaken that advantage and slow the shift away from cash.

Sharma’s central message is therefore straightforward: rather than charging users for UPI, the state should recognise the wider savings generated by digital payments and use a portion of those gains to sustain the infrastructure that enables them.

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