The debate over UPI MDR has moved beyond the question of whether merchants should pay for high-value transactions. A report by IIT-Bombay professor Ashish Das and former RBI official Pragya Das argues that the proposed revenue model could reshape who funds India’s public digital payments infrastructure, how banks are compensated and whether UPI remains trusted as a low-cost payment system.
The report, titled “UPI at a Crossroads: Reintroducing the MDR”, proposes reducing the merchant discount rate on specified merchant UPI transactions to 0.08% from the 0.40% framework reported by the Times of India. It recommends a 0.06% share for third-party application providers such as PhonePe and Google Pay, while retaining a 0.02% share for payment service providers, predominantly banks.
Its most consequential recommendation is that banks should give up the larger revenue share they would otherwise receive from the system. Under the existing arrangement described in the report, issuing and acquiring banks collectively receive 70% of the revenue. The authors argue that banks already benefit from the low interest rates paid on current account and savings account deposits, and should use part of that benefit to support UPI rather than depend on MDR revenue from offline merchant transactions.
This argument places UPI within a familiar infrastructure question: who pays for a system when its public value is much larger than the revenue it directly generates? Roads, railways and public utilities are often assessed not only through user charges but also through the wider economic activity they enable. The IIT-Bombay report makes a similar case for UPI, describing it as public digital infrastructure whose productivity gains outweigh the additional revenue that could be collected through merchant fees.
The report’s proposed funding mechanism is linked to the economics of CASA deposits. It says banks recorded a net interest margin of more than Rs 4.85 lakh crore from current account and savings account deposits in FY26. The authors describe this as disproportionate compensation for offering a limited range of services free of charge. They suggest that banks could set aside around 3% of the funds that CASA depositors forgo through lower interest earnings, estimated at Rs 15,000 crore, to operate and upgrade the UPI ecosystem.
The proposal therefore challenges the assumption that every part of the payments chain must be funded through a transaction-level fee. Instead, it treats banking margins and the broader value of digital payments as part of the funding conversation. Whether that approach is adopted remains a policy question, but the report makes clear that the dispute is about the architecture of the payment system, not merely the size of a charge on a merchant’s invoice.
The NPCI framework reported in the article takes a different approach. Under a circular issued on September 15, a 0.4% MDR applies to person-to-merchant UPI transactions above Rs 2,000 in specified categories. The fee is to be paid by merchants rather than consumers. For transactions worth Rs 75,000 or more, the charge is capped at Rs 300. Routine person-to-person transfers and most ordinary merchant payments remain free, while payments above Rs 2,000 for essential services such as railways, telecom, fuel and insurance attract a flat Rs 5 charge.
The framework also provides for a 0.02% MDR on capital market transactions, including mutual fund investments and stockbroking, with the fee capped at Rs 300. The stated objective, according to the report, is to establish a sustainable revenue model for the digital payments ecosystem. The IIT-Bombay paper accepts the need to fund the system but questions whether the proposed structure is proportionate to the cost of providing the service and to the public role UPI now plays.
That concern is especially visible in the report’s discussion of high-value transactions. It questions a charge of Rs 300 on a peer-to-merchant UPI payment of Rs 75,000 or more, arguing that the cap raises a question about whether the service charge remains broadly aligned with the average cost of providing the service. The paper refers to RBI regulations requiring service charges to remain broadly in line with the cost of the underlying service.
The issue is not only the amount paid on an individual transaction. A percentage-based fee also creates different effects for small and large merchants, depending on transaction values, business models and the availability of alternative payment methods. The report notes that many merchants covered by the UPI MDR framework already levy charges on transactions exceeding Rs 2,000 and also accept credit card payments. It recommends lowering credit card MDR to address the concern that credit card users create an additional burden for person-to-merchant UPI users.
The paper also rejects the idea that UPI should simply inherit the credit card MDR model. It says there is no clear rationale for applying the credit card structure to UPI and proposes that, if an ad valorem fee is introduced, the maximum charge should be limited to Rs 40 per transaction. That recommendation would preserve a link between transaction value and system funding while placing a significantly lower ceiling on the amount merchants could pay.
Its alternative revenue model focuses on the largest businesses. The report recommends making UPI mandatory for merchants with annual turnover of Rs 50 crore or more, equivalent to around Rs 4 crore a month, while limiting charges to merchants above that threshold. It says such a structure could account for approximately 90% of the MDR proposed by NPCI. The proposal would shift the burden away from a broad set of transactions and towards larger businesses that are more likely to have the capacity to absorb payment-related costs.
The report also suggests that NPCI could introduce a reasonable charge within the existing legal framework on all online person-to-merchant UPI transactions involving e-commerce companies. This distinction between offline and online payments is important because the paper views digital payments as a system with different commercial contexts rather than as a single uniform service. It additionally recommends continuing the Payments Infrastructure Development Fund so payment aggregators can bring more merchants onto digital platforms.
Several recommendations extend beyond MDR. The authors call on the RBI and the government to direct banks to treat UPI as an essential service that must be offered to remain in the banking business. They compare this proposed obligation with the adoption of Core Banking Solutions, which became a necessity for banks. The comparison frames UPI not as an optional product but as a basic capability expected of institutions participating in modern banking.
The report also questions the retention of generous fee-free ATM withdrawal allowances when consumers have access to digital payment options. This recommendation connects UPI funding to the wider cost structure of retail banking, although the supplied report does not establish how such a change would affect different groups of consumers, especially those who remain dependent on cash or have limited access to digital services.
The larger urban and economic question is whether a digital public infrastructure can remain widely accessible while the institutions that operate it receive enough compensation to maintain reliability and expand coverage. UPI is used across retail transactions, transport-related payments, utilities and online commerce. The dispute over MDR consequently reaches beyond banks and payment companies: it concerns the cost of a basic layer of everyday economic activity.
The evidence supplied establishes two competing frameworks. NPCI’s reported circular seeks a transaction-linked revenue stream for selected payments, with fees paid by merchants and most routine uses remaining free. The IIT-Bombay report argues for a lower MDR, a smaller role for bank revenue sharing, greater use of banking margins and a stronger focus on large merchants and online commerce. What remains unresolved is which funding model can sustain the network without making users or merchants view UPI as an expensive or unpredictable service.
The next stage of the debate will depend on how the RBI, the government, NPCI and banks respond to the report’s recommendations and to the MDR framework described in the circular. The central policy test is clear: create a sustainable revenue model without weakening the affordability and confidence that made UPI a foundational part of India’s digital economy.
