Zero MDR on UPI challenging sustainability of system: CareEdge Research

A zero merchant discount rate (MDR) on the Unified Payments Interface (UPI) challenges the long-term sustainability of India’s real-time payment ecosystem, according to a report by CareEdge Research.

 

The next phase of growth for UPI, which currently has around 500 million users, will depend on smart monetisation through value-added services such as micro-credit, merchant analytics, insurance, and fintech partnerships.

 

The report said that UPI is well-positioned to consolidate its role as the backbone of India’s payments landscape on the back of interoperability and a conducive regulatory environment.

 

“UPI transactions have registered a phenomenal 49 per cent CAGR between financial year 2023 (FY23) and FY25, underscoring rapid adoption with rising internet penetration as well as deepening penetration in Tier II and Tier III cities. However, its zero-MDR framework challenges long-term sustainability,” said Tanvi Shah, senior director, CareEdge Research.

 

MDR refers to the fee merchants pay to banks or fintech companies for processing a payment transaction.

 

Earlier this year, the Payments Council of India (PCI), which represents digital payment players, wrote to Prime Minister Narendra Modi seeking a 0.30 per cent MDR on transactions at large merchants.

 

The report added that India’s payments system is undergoing a structural shift towards a hybrid model. This implies that both physical and digital transaction channels co-exist, each with its own distinct yet complementary roles.

 

It noted that cash’s relevance was attributed to its role in personal budgeting and cultural practices and as a hedge against risks against cyberattacks or network failures.

 

“Despite the rise of a digital-first economy, cash remains a vital component of the payment system due to its reliability, inclusivity, and widespread accessibility, especially in rural and informal sectors,” the report stated.

 

The preference for cash comes even as retail digital payments in the country have steadily grown to 92.6 per cent in the first quarter of financial year 2025-26 (FY26) from 89.1 per cent in FY23. This growth in this share is driven by UPI, which is now being used for micro-payments.

 

The average transaction value of UPI transactions was recorded at ₹1,330 in Q1FY26, down from ₹1,662 in FY23.

 

“From 70 per cent share of cash usage in Private Final Consumption Expenditure (PFCE) in FY23 to 50 per cent in Q1FY26, India has been witnessing a payments system revolution, where cash and digital transactions will co-exist to drive financial inclusion and power a truly inclusive economy,” said Kalpesh Mantri, assistant director, CareEdge Research.

 

PFCE refers to the spending by resident households and non-profit institutions serving households (NPISH) on final goods and services, whether produced domestically or abroad.