Is free UPI viable? Pricing vital for digital public infra's future

The debate over UPI pricing is shifting as zero-MDR strains the ecosystem, raising questions over who should bear costs and whether a calibrated MDR can sustain digital public infrastructure

The passage of the Taxation and Other Laws (Amendment) Bill, 2026, has paved the way for a merchant discount rate (MDR) using the Unified Payments Interface (UPI). It allows the government to weigh which of the digital payment methods are to remain free, though it will be some time before a pricing structure is in place. Reserve Bank of India (RBI) Governor Sanjay Malhotra last Wednesday said discussions on the structure of a potential MDR for UPI were still premature and continued investment was needed to further strengthen the real-time payments system.  “The costs have to be paid by someone. We all want this public infrastructure to continue to strengthen and become more efficient. We continue to do that and it is our primary focus as of now,” Malhotra said at the Monetary Policy Committee press conference. 

The UPI ecosystem has been supported through a combination of RBI’s Payments Infrastructure Development Fund (to subsidise the deployment of payment acceptance infrastructure in Tier-III -VI cities) and government incentives to compensate for the zero-MDR regime. 

“As policy support appears to be reducing and the long-term sustainability of zero-MDR is being debated, a calibrated (MDR) framework could potentially create a larger recurring revenue pool for UPI participants than the current incentive structure,” said Rohan Lakhaiyar, partner (financial services risk advisory), Grant Thornton Bharat. 

We have travelled some distance. 

Situating UPI pricing 

The rethink on pricing UPI was aired in a 2022 RBI discussion paper on ‘Charges in Payment Systems’ which made a case for pricing the platform. It stated that in any economic activity, including payment systems, “there does not seem to be justification for a free service, unless there is an element of public good and dedication of the infrastructure for the welfare of the nation. But who should bear the cost of setting up and operating such an infrastructure, is a moot point.” This aspect had engaged the payments’ industry since the launch of UPI in 2016 and had figured in talks with Mint Road — because without correct pricing, just about everybody in the payment ecosystem came under the pump. 

Yet, pricing UPI was a political hard-sell. It was evident within days of the release of the RBI paper. On August 21 (on a Sunday, post-noon), North Block tweeted that UPI is a digital public good with immense convenience for the public, and productivity gains for the economy. “There is no consideration in the government to levy any charges for UPI services. The concerns of the service providers for cost recovery have to be met through other means,” it said. This left many wondering: Just what could those “other means” be? The tweet made it clear, however, that those who make up the payments world and the government differed hugely on the pricing of UPI, and its desirability. 

But on April 6, 2023, came the first signs that the narrative was changing – Mint Road allowed banks to offer credit via UPI. It was to convey that banks now had another business stream to generate revenue. 

What may unfold 

The coming days will see debates centred around issues raised by the RBI paper. It had sought feedback on three critical aspects. Given zero-pricing on UPI, is subsidising the way out? How is the MDR to be pegged: Is it to be a percentage of the ticket-size or a flat fee? Should charges be administered (say, by the RBI), or market-driven? UPI was not free when introduced. It was priced  between ₹2 and ₹5 on person-to-person, and peer-to-merchant (P2M) transactions. Then on August 30, 2021, the Central Board of Direct Taxes put a stop to it. This has acted as a catalyst for UPI, during the pandemic and since. It was also felt that it kept the retail trade humming. The worldview being: Had UPI not been free, consumption would have headed further south.  

In fact, in 2019, the Bank for International Settlements said that with UPI and Aadhaar, India had batted well: The financial inclusion progress made in the seven years (since their introduction at that point in time) would otherwise have taken nearly five decades. 

“As on date, it is the intermediaries (banks) which are bearing the cost, not the merchants. This power equation will now see a material change,” noted Pushpa Marwal, banking analyst at Forrester’s Financial Services Practice. Her point is that globally too, no real-time payment system has stayed free forever — even Brazil’s Pix, often held up as a model, prices merchants.

“The exact structure of MDR is ultimately a matter of policy design, but I believe any framework should be calibrated to merchant size and business turnover rather than adopting a one-size-fits-all approach,” said Raman Khanduja, founder and chief executive officer, Mintoak.  

“A differentiated model protects smaller merchants while creating a more sustainable economic foundation for banks and the payments ecosystem to continue investing in innovation, security and merchant services.” 

“The emerging model for UPI is a tiered or use-case-based approach. This demonstrates recognition of the need to develop commercial models for UPI, now that it has achieved significant adoption. The offering of credit on prepaid instruments and the MDR on RuPay-UPI-credit cards for ticket sizes above ₹2,000 was a move in the right direction,” observed Uttam Nayak, former head of Visa Direct, and senior vice-president, Visa Inc (he was also India head of Visa International). 

This might also help a relook at the pricing model for Rupay debit and Rupay credit on UPI for large merchants, who pay no MDR on ticket sizes below ₹2,000. “One can argue that UPI being part of the broader DPI (digital payment infrastructure) should remain free.  

But that argument does not hold water for large merchants, who pay MDR on cards otherwise,” said Ranadurjay Talukdar, partner and leader, payments consulting at EY India. 

The zero-MDR regime was introduced on Rupay-UPI-debit cards in the July 2019 Union Budget on transactions of up to ₹2,000. Even back then, the payments industry was for linking this to merchant revenues of up to ₹20 lakh instead of giving a flat exemption on ticket-sizes of up to ₹2,000 at all outlets.  

This would have given relief to smaller merchants; larger outlets should have absorbed the MDR. 

On the specific issue of MDR, neither the Nandan Nilekani Report of 2019, nor the Ratan P Watal Committee of 2016 made a case for zero-MDR. Both were for market forces to determine it. Short point: To the extent the government subsidises, the cost is being borne by taxpayers for the MDR foregone when you order purchases for up to ₹2,000 on Amazon, Flipkart, or a Swiggy. This, even as banks – issuers and acquirers—on the Visa International and MasterCard International networks make more money because there is a healthy MDR to be carved out.  

This was why the RBI paper in the context of debit cards was for keeping the pricing free on UPI P2M at merchant outlets with a revenue of up to ₹40 lakh. 

That said, Talukdar concedes, “The challenge will be implementation by acquiring banks and payment aggregators, given the lack of visibility around merchant turnover and issues around merchant misclassification, which need to be corrected.”

One thing to note: The issue of UPI pricing comes at a time of a raging debate over freebies. And as we near a decade since demonetisation. 

 

Change on cards?

• UPI is supported through a combination of RBI’s Payments Infrastructure Development Fund Scheme and government incentive to compensate for the zero-MDR regime
• Rethink on pricing UPI was aired in a 2022 RBI discussion paper on ‘Charges in Payment Systems’ 
• On April 6, 2023, Mint Road allowed banks to offer credit via UPI. A key debating point will be around the way MDR is to be pegged: Whether it will be a percentage of the ticket size or a flat fee
• As on date, banks are bearing the cost, not merchants