Next phase for UPI

Modest charges will enable healthy growth

The UPI and Services Steering Committee on Tuesday decided to set the merchant discount rate (MDR) at 0.4 per cent for person-to-merchant Unified Payments Interface (UPI) transactions above ₹2,000. For transactions of ₹75,000, the MDR has been capped at ₹300, which will  be paid by merchants. Consumers are exempt from the MDR, and there will be no fee on person-to-person transactions. The decision came after the Union government on Monday issued a notification restricting banks and other system providers from imposing charges, directly or indirectly, upon a person making or receiving payments through electronic modes. The restriction is specifically for RuPay-powered debit cards and UPI transactions up to ₹2,000. The notification follows the passage of the Taxation and Other Laws (Amendment) Bill, 2026, which amended the Payment and Settlement Systems Act, 2007, to enable this change.

 

The passage of the above-mentioned Bill last month sparked a debate on whether UPI transactions should be charged. Several commentators, including on this page, have argued against imposing the MDR at any rate. To be fair, UPI is one of India’s biggest success stories of the past decade and has revolutionised the payment system, including in rural areas. Annual transaction volumes have grown at a compound annual growth rate (CAGR) of 188 per cent between 2016-17 and 2025-26. The average transaction value has increased by a CAGR of 155 per cent during the same period. The system handles 660 million daily transactions on average. In 2025, UPI accounted for about 49 per cent of real-time payment-transaction volumes globally.

 

Given the growth in UPI transactions over the past decade, it is reasonable to argue that adoption will only increase in the future. Thus, it is important that the system is self-sustaining. Earlier this year, a parliamentary committee noted that the government’s incentive on UPI covered only 11 per cent of the cost and 14 per cent of potential MDR collection. This is clearly not a sustainable model for the long run. There were two potential solutions. Either the government substantially increased its support to banks and other service providers, or it allowed them to recover the cost from a section of users. The second option, which has now been adopted, is viable and sustainable. The government notification and NPCI communication make it clear that transactions up to ₹2,000 will not attract any charge and, thus, will not affect low-value daily retail transactions. Transactions above ₹2,000, according to estimates, account for only 4-5 per cent of the total, though they constitute about 70 per cent of the value.

 

The MDR rate for UPI is modest, capped at the higher end, and has exceptions, which will help strike the balance between developing and funding the system. It is important that the payment business is profitable for banks and fintechs to continue investing in improving services and strengthening cybersecurity. This will also encourage more fintechs to enter the market and compete for volumes. It must be noted that while government support has helped the UPI-based payment system to grow rapidly, it has also turned the market into a virtual duopoly dominated by firms with deep pockets. This is not a desirable position. Thus, a reasonable level of MDR will enable healthy growth in the market. It has been argued that the MDR could push people back to using cash, but cash handling also entails a cost for both individuals and merchants. In any case, the numbers for cash in circulation suggest that those using cash, particularly for high-value transactions, perhaps never moved to digital means.