Merchant-funded UPI MDR of 30-40 bps most likely if introduced, consumers likely to remain unaffected: Bernstein
New Delhi, August 5
If the government eventually introduces a Merchant Discount Rate on Unified Payments Interface transactions, the charges are likely to be borne by merchants while remaining free for consumers, with exemptions for small merchants and low-value transactions similar to the existing RuPay credit card-on-UPI framework noted a report by Global brokerage firm Bernstein.
In its report following an investor webinar on UPI monetisation, Bernstein said a merchant-funded MDR of 30-40 basis points (bps) appears to be the most likely outcome if the government decides to permit such charges.
"Based on debit card MDR benchmarks, RBI cost estimates, and comparable payment instruments, we believe an MDR of 30-40bps is the most likely outcome," the brokerage said.
The observations come amid policy discussions following the introduction of the Taxation and Other Laws (Amendment) Bill, 2026, which proposes changes to the Payment and Settlement Systems Act to remove UPI's automatic statutory exemption from MDR. While the proposed legislation does not levy MDR, it would empower the government to notify which digital payment modes remain exempt from merchant charges.
According to Bernstein, UPI transactions continue to impose technology, infrastructure and processing costs on banks, the National Payments Corporation of India (NPCI) and payment platforms. However, these costs have historically been offset by broader ecosystem benefits, including lower ATM usage for banks, reduced currency handling costs for the government and greater digitisation benefits for merchants.
"There is a credible case for retaining the current framework. That said, the need for payment platforms to monetize their infrastructure investments, combined with recent policy discussions, has brought the MDR debate back into focus," the report said.
The brokerage noted that transactions above Rs 2,000 account for only around 4 per cent of UPI volumes but nearly 70 per cent of transaction value, making them the most practical starting point for monetisation while limiting disruption to overall payment volumes.
Bernstein estimated that under a 40 bps MDR regime, with payment platforms retaining around 5 bps, the ecosystem could generate a profit pool of nearly Rs 30 billion with minimal incremental costs. It added that such a framework could expand payment platforms' net revenue pools by about 20 per cent, while profit before tax for individual platforms could increase by roughly 20-30 per cent.
At the same time, the report cautioned that an MDR on UPI could raise costs for small merchants by around Rs 150 per month, equivalent to nearly two to three times the monthly subscription fee for a UPI payment device. While this could improve merchant acquisition economics and encourage new entrants, it may also limit the gains retained by incumbent payment platforms.
Summarising discussions from the investor webinar, Bernstein said lending is expected to remain the primary earnings driver for payment platforms, with MDR serving as an incremental profitability lever rather than the core revenue source.
— ANI
Reader Comments
Wait, so they're saying only 4% of transactions (above Rs 2000) would be affected? That actually makes sense. As a consumer, UPI has been a game-changer for me - no more ATM queues, instant payments. If merchants bear the cost and I remain unaffected, I'm all for it. But I hope they don't pass it on to consumers indirectly through higher prices. 😅
This is the classic "free lunch" problem. Indians have gotten so used to free UPI that we forget it costs money to maintain. But honestly, the government should think twice - UPI's biggest strength has been its zero-cost appeal. The moment you add MDR, you risk pushing people back to cash. Remember what happened when they tried to charge for RTGS/NEFT?
As someone who works in fintech, I can tell you that the payment platforms have been bleeding money for years. The infrastructure isn't free - NPCI, banks, app developers all need to earn a living. A 30-40 bps MDR could actually bring more competition and innovation. But the government needs to be careful to protect small merchants, otherwise digital India will become digital divide India. 🇮🇳
I've been using UPI since 2017 and it's transformed how I do business. But let's be honest - the "free" model was never sustainable. The question is whether this is the right timing. With elections around the corner, any talk of charges could be politically sensitive. The government should focus on increasing transaction value rather than charging for every rupee.
We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.