Banks to plough back UPI MDR gains into tech, security and expansion

SBI, Axis Bank and Bank of Baroda plan to reinvest proceeds from the proposed UPI MDR levy in technology, security, infrastructure and merchant expansion rather than boost profits

Even as clarity is awaited on the effective date of the proposed 40-basis-point (bps) merchant discount rate (MDR) on UPI person-to-merchant (P2M) transactions above ₹2,000, banks, particularly large lenders that are key players in the UPI ecosystem, have indicated that the proceeds will be reinvested to further expand the platform, acquire more merchants, and strengthen its security and technological capabilities, rather than add to their income or profitability.

 

Last month, just two days before the scheduled implementation of the merchant discount rate (MDR) on select Unified Payments Interface (UPI) transactions on October 15, the National Payments Corporation of India (NPCI) deferred the levy until after Diwali. The new date of implementation has not yet been notified by NPCI.

 

The MDR will apply to UPI transactions made to merchants above ₹2,000. The MDR is set at 0.40 per cent and capped at ₹300. Some categories of merchant transactions, including bill payments, fuel and education, among others, will attract a flat fee of ₹5.

 

An MDR is a fee paid by a merchant to the bank and payment company processing a digital transaction.

 

When asked how much revenue State Bank of India (SBI), the largest issuer bank and one of the biggest payment service providers (PSPs) in the UPI ecosystem, expects to earn from the proposed MDR on person-to-merchant (P2M) transactions above ₹2,000, SBI Chairman C S Setty said the levy should not be viewed as a revenue stream for the bank.

 

“Let us wait for the final implementation of MDR. We should not look at MDR as a revenue item. It is more about the ability of the system to spend continuously and augment technology and security features. Even a small amount of MDR would be quite useful in strengthening the system,” Setty said at the bank’s Q2FY27 earnings press conference.

 

Echoing similar views, Arnika Dixit, Group Head – Wealth Management, Affluent Banking, Cards and Payments at Axis Bank, said the bank was not in a position to provide specific guidance on the revenue it could earn from the proposed MDR, as its implementation had been deferred. “Whenever it is implemented, the bank is committed to using a part of the revenue to further grow the ecosystem by expanding its merchant footprint and meeting the infrastructure costs incurred in maintaining UPI,” Dixit said at the bank’s post-earnings analyst call for Q2FY27.

 

Axis Bank is the largest PSP in the country. A PSP bank is a bank that provides the technology and infrastructure to connect users and payment apps to the UPI network and facilitate transactions.

 

Under the proposed structure, a merchant would pay up to 0.40 per cent of the transaction value as MDR, which would then be distributed among the various players in the UPI ecosystem. For a ₹10,000 transaction, the merchant would pay ₹40. The acquiring bank would receive ₹40 but pay ₹28 to the issuing bank, leaving it with ₹12. The issuing bank would receive ₹28 but pay ₹12 to the payer-side PSP, leaving it with ₹16. The PSP would receive ₹12 and pay ₹8 to the app provider, retaining ₹4. In other words, of the ₹40 generated as MDR, the acquiring bank retains ₹12, the issuing bank ₹16, the payer PSP ₹4 and the app provider ₹8.

 

In the UPI ecosystem, SBI is the largest issuer bank, followed by Bank of Baroda, HDFC Bank, Union Bank of India, Punjab National Bank, Canara Bank, Axis Bank and others. Meanwhile, Axis Bank has a market-leading position in the UPI payer-PSP space, with a market share of around 38 per cent by volume.

  

Brokerages have estimated that MDR will generate ₹15,000–20,000 crore in revenue for the payments ecosystem.