Merchant discount rate on UPI: Small apps to bet on customer base

Potential UPI MDR could boost revenues for dominant players like PhonePe and Paytm, while giving smaller apps a viable path to profitability and customer acquisition

Dominant digital payment platforms PhonePe and Paytm stand to capture a larger share of the digital payment fee that may be restored under a Bill currently making its way through the Parliament. 

However, smaller apps in the ecosystem will have to expand their presence for benefiting from the regime change in digital payments, industry executives said. 

Fintech executives Business Standard spoke to said smaller apps will now have a commercial reason to spend on winning users. They, however, do not see a large shift in market share immediately. 

A merchant discount rate (MDR) is likely shared between the Unified Payments Interface (UPI) platform or app, the acquiring bank or the bank enabling acceptance for a merchant, the payer’s bank, the payment aggregator, and the network. 

The acquiring side is expected to earn a higher share of a potential fee. Companies like PhonePe, GPay and Paytm are among the few fintechs who hold dominant positions in terms of both: number of active merchants and customers. 

In India, there are 47 third-party UPI apps, according to data from the National Payments Corporation of India (NPCI). 

Barring the top three — PhonePe, GPay and Paytm — the combined UPI market share by volume of these apps and other banking apps stands at around 17 per cent. 

The top three apps command 83.23 per cent volume share and 86.29 per cent value share. 

Executives added that a potential MDR will solve issues around sustainability of the payments system. 

Having no provision for MDR on UPI, which sees daily transactions going up to 30 crore, has choked the entire ecosystem for funds for both sustaining it and for scaling it to onboard the next set of 30 crore Indians, said Vishwas Patel, managing director, AvenuesAI Ltd and chairman, Payments Council of India, an association representing digital payments companies. 

"With increasing deployment and servicing costs as well as increasing Reserve Bank of India (RBI) compliance costs, this move by the government will help resolve the sustainability issues faced by and help all payment aggregators, third-party application providers and other ecosystem players to sustain and grow UPI penetration in the hinterland of our country,” said Patel. 

UPI apps have long burned cash on rewards and cashbacks, betting they could sell those users a loan or a credit card later. A fee on the payment itself would mean firms can earn something on the transaction. 

Over the past few years, several new third-party UPI apps have entered the market, most built around a specific use case such as credit cards, bill payments and lending rather than payments alone. 

“Earlier, apps built around credit card use cases would discourage savings transactions because those were unprofitable payments. Now, there will be some path to profitability and reinvestment once a potential MDR structure kicks in even if there will not be a major swing,” said the founder of a credit card-on-UPI fintech. 

An MDR is the fee a merchant pays to accept a digital payment. It is charged as a percentage of the transaction value to a merchant. 

Since 2020, newer third-party application providers have emerged such as Jupiter Money, Navi, Kiwi, BharatPe, POP UPI and super.money, among others. 

The person explained that apps on the payer side — a registered user who pays on the platform — are likely to get a smaller share of the MDR fees even as negotiations are still away. Instead, platforms such as PhonePe, GPay and Paytm, who have acquired a large base of merchants and users combined, would stand to win a major chunk of the MDR pool. 

An MDR is likely to enable companies to either recover part of similar costs in the future or reinvest in building a base of new users. 

According to a note by global brokerage Jefferies, an MDR of 15-30 basis points (bps) on UPI transactions valued above ₹2,000 could generate between ₹5,000-10,000 crore by financial year 2027-28 (FY28). 

The introduction of MDR on UPI, however, will have to wait as the Taxation and other Laws Amendment Bill, 2026, which proposed changes to the Payment and Settlement Systems Act, 2007 needs to go through Rajya Sabha and also get Presidential ascent. On  August 6, Lok Sabha passed the Bill. 

As per the proposed amendments, MDR exemption will be limited only to the electronic payment modes specified by the Central government. 

Once the legal framework is in place, different parties need to negotiate the fee rates among different participants in the industry.