UPI’s Zero-Cost Promise May Be About To Break
After nearly six years of free transactions, the government is reportedly weighing a narrow, targeted return of MDR on UPI — and the reasons go deeper than just raising revenue.
| Summary | |
|---|---|
| 1 | The Centre is considering reintroducing a small Merchant Discount Rate (MDR) on high-value UPI transactions by large merchants, signalling a potential shift away from the six-year zero-MDR regime. |
| 2 | The move could finally create a sustainable monetisation model for banks and payment aggregators that have been processing the majority of UPI transactions without earning transaction fees. |
| 3 | Industry executives say the biggest hurdle could be implementing a turnover-linked MDR, since there is currently no standardised mechanism to verify merchant turnover and enforce compliance without adding operational complexity. |
For almost six years, UPI has run on a simple, zero-cost promise: no Merchant Discount Rate, no platform fee, no technology fee, on any transaction. That promise is a big part of why UPI grew from a niche payment rail into the backbone of India’s digital economy — processing over 2,272 crore transactions worth ₹28.92 lakh crore in June alone.
But that same zero-cost model is quietly becoming the payments ecosystem’s biggest unresolved problem. According to recent reports, the Centre is now weighing a targeted reintroduction of MDR — not across every transaction, but on a narrow slice of high-value payments made to large merchants.
In other words, the small and micro businesses that make up the bulk of India’s UPI story — the tea stalls, the kirana stores, the local vendors — would see no change at all. The proposal, as it’s currently being discussed, is squarely aimed at large-value transactions from big merchants.
This Isn’t the First Time the Idea Has Come Up
The idea of bringing MDR back to UPI has surfaced more than once. The Payments Council of India has previously pushed for a flat 0.3% MDR on large-merchant UPI transactions, and the Parliamentary Standing Committee on Finance has recommended a phased reintroduction. As recently as last year, the Finance Ministry dismissed similar reports as baseless.
How We Got Here: The MDR Timeline
| Year | Event | MDR Status |
|---|---|---|
| 2016 | NPCI launches UPI; demonetisation accelerates adoption | MDR Applicable |
| 2018 | RBI introduces a revised MDR framework for debit card and UPI merchant transactions — 0.25% for small merchants, 0.65% for large merchants | MDR Applicable |
| 2019 | Government amends the Payments & Settlement Act | MDR Abolished |
| 2020 | Zero-MDR regime comes into effect | No MDR |
| 2021–22 | Government launches an incentive scheme for low-value UPI transactions | No MDR |
| 2022 | Parliamentary Standing Committee suggests phased MDR reintroduction; Payments Council of India seeks MDR restoration | No MDR |
| 2025 | Government’s incentive allocation is reduced sharply | No MDR |
| 2026 | Reports indicate government is considering selective MDR for large merchants | No MDR |
Even so, the fact that this conversation keeps resurfacing — this time with specific turnover and ticket-size thresholds attached — suggests the zero-MDR regime is under real, sustained strain. Founders and executives in ongoing discussions with NPCI, RBI and the finance ministry say implementation of MDR on select UPI transactions could be just a few weeks away, though no formal proposal has been announced yet.
The debate that keeps resurfacing isn’t really about new revenue. It’s about who pays to keep India’s digital payments infrastructure running.
Why UPI’s Zero-MDR Model Broke
The underlying math becomes clear once you look at who is actually processing UPI payments day to day. Rajesh Londhe, CEO of payments aggregator startup PhiCommerce, notes that UPI now makes up 60–65% of the total transaction volume flowing through payment aggregators. Under NPCI’s current rules, none of that volume can be monetised — no MDR, no platform fee, not even a basic technology fee.
For aggregators whose entire business is collecting payments on behalf of merchants, that turns the majority of their transaction volume into a cost centre instead of a revenue line. Government incentive schemes were meant to bridge that gap, but Londhe points to a structural flaw in how the money actually flows: subsidies are typically routed to the acquiring bank, not to the payment aggregator or technology provider that built and runs the merchant-facing infrastructure. Only a handful of integrated players — Paytm being the clearest example, having once combined a bank, a payment aggregator and a third-party app under one corporate roof — were positioned to capture a meaningful share of that subsidy.
A Shrinking Subsidy, A Growing Network
| Financial Year | RuPay & BHIM-UPI Incentive Outlay |
|---|---|
| FY24 | ₹3,631 crore (peak) |
| FY25 | ₹1,441 crore |
| FY26 | ₹437 crore (initial budget, later revised upward after industry pushback) |
Over the same period, UPI volumes kept climbing — from 172.2 billion transactions in 2024 to 228.3 billion in 2025. More transactions, less money set aside per transaction to support them. Industry estimates suggest the real annual subsidy requirement, just to cover person-to-merchant transaction costs, sits somewhere between ₹4,000–5,000 crore — several times what’s currently being budgeted.
