MDR charges could shatter India’s payment revolution

India’s UPI ecosystem stands at an inflection point. It has achieved scale exceeding global peers - 22 billion monthly transactions amounting to Rs 29.87 lakh crore represent a genuine transformation. But that transformation is entering a new phase where affordability and universality will be tested against sustainability costs

In July 2026, India’s Unified Payments Interface processed 22 billion transactions - amounting to approximately Rs 29.87 lakh crore. These numbers represent a genuine revolution in how Indians move money, a democratisation of financial infrastructure that seemed impossible a decade ago. Yet they conceal a problem few have articulated plainly: the revolution is running out of money to sustain itself.

India’s UPI system has achieved remarkable scale, with 741 banks going live on the platform. Digital modes now account for 99.8 per cent of total transaction volume and 97.9 per cent of transaction value as of Q1FY27. The ecosystem is globally acknowledged by the International Monetary Fund as the world’s largest real-time payment system by transaction volume. But this dominance rests on a fragile foundation: the assumption that payments infrastructure, cybersecurity, and fraud prevention can be sustained indefinitely at zero cost. That assumption is about to break.

The sustainability crisis: The numbers behind the crisis

India’s UPI ecosystem is built on a “negative-revenue model” - infrastructure costs money, but nobody pays. The government has borne these costs through direct subsidies. The RBI approved a Rs 21,500 crore incentive scheme for FY25, but this cannot continue indefinitely.

The numbers tell the story. UPI merchant payments in FY26 totalled Rs 61.13 lakh crore. Person-to-Merchant (P2M) transactions constitute 29 per cent of total UPI transaction value, while Person-to-Person (P2P) transactions account for 71 per cent. Crucially, within P2M transactions, 67.2 per cent of transaction value exceeds Rs 2,000. This means only approximately 19.5 per cent of total UPI transaction value would remain free under any proposed merchant discount rates (MDR) framework.

The CareEdge Report (August 2026) calculates that a nominal MDR of 0.25 per cent-0.50 per cent on select higher-value merchant transactions could generate gross revenue of Rs 15,000-30,000 crore, with every 10 basis points of MDR generating approximately Rs 6,113 crore. These are not speculations. They are calculations based on actual NPCI transaction data, representing the revenue gap the ecosystem currently faces.

The government’s answer: MDR on high-value transactions

The government is formalising this revenue model through a proposed amendment to the Payment and Settlement Systems Act. The framework is positioned as an “enabling measure to develop a self-sustaining revenue model, encourage greater participation and competition among ecosystem players, and reduce reliance on subsidies.”

The government has been explicit: UPI transactions for consumers and all P2P payments will remain free. Any MDR will be limited to select merchant transactions above specified thresholds and remain nominal. The vast majority of everyday transactions - a Rs 500 auto-rickshaw ride, a Rs 1,500 grocery purchase - will be unaffected. Merchants undertaking high-value transactions will absorb a cost.

That is where the problem begins.

The merchant burden: Costs get passed to customers

The CareEdge report explicitly warns: This could particularly affect merchants undertaking high-value UPI transactions, who may seek to pass on the additional cost to customers, potentially incentivising customers to shift to alternative payment modes.

A merchant selling a Rs 20,000 jewellery item or a Rs 50,000 air ticket through UPI will face charges of Rs 50-500 per transaction (depending on final MDR rate). For merchants operating on 5-15 per cent margins, this cannot be absorbed internally. It will be passed to customers.

The consequence is predictable: customers will shift away from UPI. A traveller paying Rs 1,000 for a flight will, if faced with a Rs 2.5-5 UPI surcharge, simply switch to credit card or bank transfer. These shifts will be invisible to UPI’s aggregate statistics but significant in the high-value segment where MDR would generate the most revenue.

This creates a perverse incentive: the very segment the government hopes to monetise - higher-value P2M transactions accounting for Rs 12.82 lakh crore annually - will be precisely the segment most likely to migrate to alternative modes.

The real issue: Who should pay for infrastructure?

A deeper question underlies this debate: Why should citizens and merchants bear the cost of digital payments infrastructure at all?

Banks, PSPs, and third party application providers (TPAPs like Google Pay, Paytm, PhonePe) are the real beneficiaries of the UPI revolution. They have built massive businesses on zero-cost infrastructure. A bank offers UPI-enabled accounts at no charge, but the cost is subsidised by the government. Similarly, fintech companies acquired hundreds of millions of users precisely because UPI transactions are free; they monetised users through data analytics and advertising, not through payments themselves.

The proposed MDR is, in effect, a transfer of cost burden from regulated ecosystem players to end users - merchants and customers. Civil society groups ask: Is this the right policy?

Civil society concerns: The deeper problems

Consumer rights groups and activists have flagged three concerns:

First, the precedent problem. If UPI - a public good built with taxpayer subsidies - can be monetised retroactively through MDR, what prevents similar charges on water, electricity, or postal services?

Second, the regressive impact. Small merchants selling at Rs 2,000-5,000 price points will be most hurt. These are precisely the merchants digital payments were designed to serve. Imposing costs at this threshold could push them back toward cash.

Third, the asymmetric benefit. Banks and fintech companies profited from UPI’s free infrastructure. They are now mature, profitable enterprises. Citizens and merchants who enabled this ecosystem should not fund infrastructure costs originally meant to be borne by the state.

The real dilemma: Who should pay?

The government’s position has merit. UPI’s expansion into rural and semi-urban markets requires substantial investment in infrastructure, cybersecurity, and fraud prevention. Sustainability is genuinely needed.

The question is not whether it is needed, but who bears the cost:

Option 1:Continued government subsidies (fiscally costly, but preserves affordability)

Option 2:MDR on high-value transactions (shifts cost to merchants and customers)

Option 3:Banks and fintech absorb costs as part of their business model

Option 4:Hybrid approach combining targeted subsidies with modest MDR

The government has chosen Option 2. Civil society has not accepted it. The CareEdge report documents the trade-offs but resolves nothing.

Conclusion: A pivotal moment

India’s UPI ecosystem stands at an inflection point. It has achieved scale exceeding global peers - 22 billion monthly transactions amounting to Rs 29.87 lakh crore represent a genuine transformation. But that transformation is entering a new phase where affordability and universality will be tested against sustainability costs.

The proposed amendment to the Payment and Settlement Systems Act is not merely technical. It is a fundamental question: Should public digital infrastructure, once built with taxpayer subsidies, be monetised retroactively?

The government believes targeted MDR is necessary and proportionate. Activists argue it will fragment the ecosystem and burden those it was meant to serve. The answer will determine not just the payments system’s architecture, but the broader social contract around digital public goods. That choice deserves far more scrutiny than it has received.

(The author is with the Cholleti BlackRobe Chambers, Hyderabad, and writes on economy, politics and law)

ABOUT THE AUTHOR

Cholleti

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