IIT-Bombay Calls for Major UPI Fee Revision
A new report from IIT-Bombay has put forward a significant recommendation to reduce the Merchant Discount Rate (MDR) for UPI transactions. The study proposes cutting the MDR to a mere 0.08% from the currently set 0.40%.
This recommendation comes amidst a framework established by the UPI Steering Committee on September 15, which set the MDR at 0.40% for merchant transactions exceeding Rs 2,000, slated to take effect from October 15, 2026. Trade bodies have already appealed to the government for a rollback of this charge.
The Rationale: Leveraging Bank Deposits
Authored by Ashish Das, a professor in IIT-Bombay’s Department of Mathematics, and Pragya Das, a former RBI official, the report argues that banks should cease relying on MDR revenue. Instead, they should utilize a portion of their substantial earnings from current and savings account (CASA) deposits to fund and enhance the digital payments ecosystem.
The study highlights that banks recorded over Rs 4.85 lakh crore in net interest margin through CASA deposits in the fiscal year 2026. The report characterizes this as “large and disproportionate” compensation for providing fundamental banking services. It suggests that banks could allocate approximately 3% of the funds effectively sacrificed by CASA depositors, equating to around Rs 15,000 crore, specifically for UPI operations and improvements.
“Banks earn substantial interest margins from the CASA depositors. They should use the same towards running and improving the UPI ecosystem and not rely on MDR revenue sharing from offline transactions,” the report states.
Proposed New Fee Structure and Splits
The IIT-Bombay report outlines a specific split for the proposed 0.08% MDR. It recommends allocating 0.06% to third-party application providers (TPAPs) like PhonePe and Google Pay, a slight decrease from the 0.08% previously suggested by NPCI. Payment service providers (PSPs), primarily banks, would retain a 0.02% share.
Crucially, the study contends that banks should ultimately forgo their share of MDR revenue, given their existing significant benefits from the low-interest rates associated with CASA deposits.
UPI as a 'Necessary Service' and Other Recommendations
Beyond the MDR reduction, the report urges the Reserve Bank of India (RBI) and the government to mandate UPI as a necessary service for banks to operate, drawing parallels with how core banking systems (CBS) became indispensable to banking operations.
The study also questions the reasonableness of capping transaction charges at Rs 300 for electronic person-to-merchant payments of Rs 75,000 and above. It cites RBI regulations requiring service charges to align with the average cost of providing the service, suggesting such a high cap is disproportionate.
Furthermore, the report advocates for introducing a “digital payment fee” for online merchant transactions related to purchasing goods or services from e-commerce companies. It also calls for a reduction in credit card MDR, noting that many merchants subject to the UPI MDR framework already levy charges on transactions above Rs 2,000 and accept credit cards. Lowering credit card MDR, the authors argue, could mitigate concerns about credit card users unfairly burdening UPI users in person-to-merchant payments.