 "Paytm, UPI")
Lack of revenue from processing Unified Payments Interface (UPI) payments and now a reduction of subsidy for the promotion of such transactions has the industry wondering: Will the reduced incentives be enough and is there a fee structure for UPI on the cards?
The Union Budget 2025 was largely silent on digital payment subsidies that trickle down to banks and financial technology (fintech) firms. In fact, the government has even slashed the financial year 2026 (FY26) outlay for promoting peer-to-merchant (P2M) UPI transactions and RuPay debit card payments.
The Centre has allocated only Rs 437 crore in the budget for the promotion of such transactions, a 78 per cent cut from the final outlay of Rs 2,000 crore allocated for FY25.
“For a lot of companies, the UPI incentive is a big component that arrives to their kitty at the end of a financial year. The ecosystem is worried since the UPI incentives have also not been paid for this year especially when there is no merchant discount rate (MDR) on UPI transactions and the payment mode continues to have explosive growth,” a fintech founder said.
Why does the subsidy matter?
The government’s reduction of subsidy assumes significance since such transactions are free of fees. For instance, when you swipe a debit or credit card at a point-of-sale terminal, the merchant has to pay a fee to the payment processing company, such as Visa or Mastercard, to complete the digital transaction. For debit cards, this may be in the tune of 0.25 per cent to 1 per cent, whereas credit cards command a slightly higher fee of 2-3 per cent.
However, this is not the case when it comes to UPI payments. Banks and fintech companies continue to burn money to process transactions of all sizes on UPI since it is free of charge.
In such a situation, where UPI payments as a product do not contribute significantly to a company’s topline, government incentives like the one announced in the budget partially cover some payment processing expenses for fintech firms. In industry jargon, these processing charges are called the merchant discount rate, or MDR, which is the fee charged by the processor for each UPI transaction made using a debit or credit card.
Is MDR on its way out?
Experts say the Budgetary outlay for FY26 for UPI payments is too low. For instance, one of the listed fintech players Paytm, which is among the market leaders in this category, earned Rs 288 crore for FY24. At the time, the centre had allocated Rs 2,485 crore for the promotion of UPI and RuPay credit card transactions.
“A cumulative lower amount in the current budget implies a much smaller pie to be divided amongst payment processing entities with the resultant receipt being much lower,” a top executive at a fintech firm said, requesting anonymity.
However, analysts are reading the development in the context of an MDR being on the cards for UPI transactions.
“What are your thoughts on the cut in budgetary allocation to UPI incentives from Rs 2,000 crores to Rs 400 crore to Rs 500 crore. Is this a precursor to MDR coming back on UPI?” an analyst asked fintech founders in one of their conference calls.
India’s UPI ecosystem, including third party application providers (TPAPs) and banks, processed a record of over 172 billion transactions in 2024 alone.
That said, the final allocation for such incentives tends to be higher than the initial outlay. For example, the government only allocated Rs 1,441 crore in FY25, which rose to Rs 2,000 crore in the final allocation.
“I don’t see there being a significant increase given the fact that the initial outlay itself has been slashed by a major percentage,” another person said.
