From October 15, a 0.4% Merchant Discount Rate (MDR) will be applied to Person-to-Merchant (P2M) UPI transactions exceeding Rs 2,000. While the Finance Ministry has affirmed that UPI will remain free for users, industry stakeholders are worried that this change could reverse significant progress in India's digital payments landscape, potentially making cash a more attractive option for many.
New Fees Spark Debate Among Merchants
The reintroduction of MDR on UPI, which currently accounts for 96% of transaction volumes, raises a critical question: will merchants absorb this new cost, or pass it on to customers? For micro, small, and medium retailers, who often operate on thin margins, this additional burden could strongly incentivize a shift back to cash transactions.
Kumar Rajagopalan, CEO of the Retailers Association of India, highlighted the dilemma. "Small merchants will now think twice about whether to accept cash or UPI. During the festive season, a large share of transactions crosses the Rs 2,000 mark, and the moment a fee attaches itself to digital payment, cash becomes the path of least resistance," he stated. For transactions of Rs 75,000 and above, the MDR will be capped at Rs 300 per transaction.
Festive Season Concerns
Santosh Katariya, president of the Clothing Manufacturers Association of India (CMAI), expressed concern about the timing, noting that introducing MDR at the start of the festive season will be challenging. "This period is critical for merchants, retailers and consumer-facing businesses, many of whom are already working hard to revive demand and improve margins. Adding another cost to digital transactions at this juncture risks putting further pressure on an ecosystem that is still finding its footing," he explained.
While the 0.4% MDR is considerably lower than the 1.5-2.5% applicable to credit card transactions, it still represents an added cost that many smaller merchants have historically avoided by not accepting credit cards.
Sustainability vs. Digital Adoption
Rajagopalan also argued that the MDR on UPI runs counter to the government’s broader financialization agenda. "Every transaction that moves off UPI and back into cash disappears from the formal trail that supports GST reporting — the opposite of what a decade of digitisation policy has tried to build," he said, suggesting the government should bear the cost of normal UPI transactions.
However, proponents of MDR argue that sustaining UPI’s massive scale requires a mechanism to recover costs. Since its launch in 2016, UPI has grown exponentially, processing 24.51 billion transactions worth Rs 29.9 lakh crore in August alone. NPCI officials estimate that maintaining UPI operations, server bandwidth, fraud prevention, and bank technical support costs approximately Rs 20,000 crore annually. Relying solely on budget allocations creates funding uncertainty and limits long-term technology investments by banks and fintech firms.
Reeju Datta, co-founder of Cashfree, acknowledged that zero MDR significantly boosted UPI adoption but pointed to the substantial operational costs. "A calibrated MDR finally gives the ecosystem a way to fund that directly and invest in areas such as fraud prevention and acceptance infrastructure in smaller towns. It will also incentivise newer players to enter the market and innovate for different use cases, which in turn could further increase UPI adoption," Datta commented.
Harsh Vardhan Masta, CEO of PB Pay, emphasized that as UPI transaction volumes and use cases scale, the focus must shift from mere adoption to long-term sustainability, including continuous investment in infrastructure, cybersecurity, and innovation. Ranadurjay Talukdar, partner and payments sector leader at EY India, added that MDR can generate resources for resilience, cybersecurity, innovation, and customer service across the payment ecosystem. "The key will be transparent sharing of MDR revenues, strict prevention of consumer surcharges and effective deployment of the proposed fund to deepen acceptance among smaller merchants and underserved markets," Talukdar stressed.
Larger merchants and retail chains may absorb the higher MDR cost, similar to how they handle credit and debit card fees. However, how smaller merchants respond to these new UPI transaction fees will be crucial in determining the future trajectory of digital payments in India.