Higher-than-expected 40 bps UPI fee set to boost fintech earnings

The framework excludes UPI-linked CC payments, and is expected to affect only 4 per cent of merchant transaction volume.

The Government of India (GoI) has notified 40 basis points (bps) merchant discount rate (MDR) on person-to-merchant (P2M) payments above ₹2,000 on UPI, with some exclusions and caps. This is higher than market expectations of 25 bps. It bumps up earnings and revenue estimates for fintechs. Going by the National Payments Corporation of India (NPCI) data, P2M transactions above ₹2,000 (across all categories) formed 4 per cent of all transactions, and accounted for 67 per cent of payments value.

 

The MDR framework excludes UPI-linked credit card (CC) payments, and is expected to affect only 4 per cent of merchant transaction volume. Small merchants are exempted. For them the cut-off is monthly quick response (QR) code-based payments of less than ₹1 lakh. 

 

MDR on essential services — such as electricity, telecom, and agricultural inputs — is capped at ₹5 per transaction. These essential services account for 46 per cent of UPI P2M transaction by value. MDR on capital market transactions will be set at 0.02 per cent, with a cap of ₹300.

 

The GoI recommends that players create a pool equivalent to 5 per cent of MDR collections to support infrastructure for smaller merchants. This can help deepen the network for UPI platforms.

 

The fintech industry faces a revenue opportunity of ₹15,000-18,000 crore, to be shared among issuers, apps, acquirers, and banks. This projection assumes that the new MDR will not alter user behaviour.

 

By giving UPI a commercial revenue model that scales with value instead of relying on government subsidies, the MDR makes UPI self-sustaining and truly transformative for fintechs.

 

The distribution of the 40 bps MDR is as follows. The issuing bank keeps 16 bps, acquiring bank 12 bps, Payer TPAP (third-party application provider) 8 bps, and Payer PSP (payment service provider) bank retains 4 bps. Hence, acquirers like Paytm and Pine Labs could keep the share of 12 bps.

 

Estimations of MDR-eligible GMV (gross merchandise value) involve many assumptions and, therefore, carry a large margin of error at this initial stage. According to one analyst, for Paytm, the UPI P2M may be around 85 per cent of GMV, of which 35 per cent by value is MDR-eligible. This could amount to ₹11.2 trillion in financial year 2027-28 (FY28). It is conservative to assume 35 per cent of GMV is eligible for MDR despite it being 67 per cent of the industry value due to caps and exemptions. A similar estimate for Pine Labs yields likely MDR-eligible GTV (gross transaction value) of ₹2.58 trillion in FY28. Both estimates assume no migration out of UPI to other modes.

 

Assuming a take rate of 6-10 bps for Paytm and Pine Labs, this could lead to FY28 MDR revenues of ₹1,120 crore and ₹155 crore, respectively, for these two companies. Similar calculations may be made for other UPI players.

 

This new revenue stream would have to be assigned a growth value using the DCF (discounted cash flow) model with an assumed cost of capital to make new projections for players like Paytm and Pine Labs. These initial assumptions are tentative. But the trend should be clear: MDR will lead to higher revenues for certain fintech players and that should eventually result in higher valuations.

 

In August this year, UPI clocked 24.51 billion transactions worth ₹29.82 trillion — averaging 791 million transactions a day — which is four times as many transactions as in August 2022 (6.58 billion). TPAPs drove consumer and merchant onboarding, while payment aggregators monetised the shift to UPI, and BBPS (Bharat Bill Payment Systems) standardised bills.

 

Going by launches and demonstrations at the recent 7th edition of the Global Fintech Fest (GFF) 2026, many companies have developed models to ride on India’s fintech and digital public infrastructure stack. All these are in early adoption mode. The common factors are using artificial intelligence (AI) across conversation servicing, data-to-insight, and agentic execution. As these are monetised, valuations could be revised up again.

 

At the GFF, Paytm demonstrated AI capabilities for enterprises as well as small businesses through Paytm Intelligence (PI). Pine Labs showcased an agentic platform for payments. Eternal demonstrated Nugget, a voice bot to handle financial services. PhonePe announced a foray into UAE and Asian markets. Razorpay has built a proprietary payments foundation model.

 

UPI penetration has created new adjacent opportunities, expanding total addressable markets for fintechs. For example, merchant relationships have turned into lending distribution, with embedded EMIs (equated monthly instalments) and credit. The ULI (unified lending interface) has 64 lenders (up 78 per cent year-on-year, or Y-o-Y), and over 136 data services, drawing on land records, GSTN, satellite imagery, and account aggregator data. While the CBDC (central bank digital currency) conceptually targets welfare leakage, asset tokenisation focuses on improving liquidity and settlement in capital markets.

 

The key risks to the upside estimates include the interchange-sharing formula (which is not clear from the September 15 NPCI notification), and elasticity at the ₹2,000 threshold. The upside could be considerable.