By – Prof. Yukti Bajaj, Assistant Professor, Finance and Accounting, IMI Delhi
Fintech innovations have always been removing frictions in the existing financial systems, processes or products, and digital payments in India is a classic example of the same. Credit cards (CC) digitized payments but at a cost that made it expensive for the merchants to accept them. UPI changed the dynamics. If MDR re-enters the digital payment landscape, Is India at risk of reintroducing the exact payment friction that UPI successfully eliminated?
On September 28, the Supreme Court declined to stay the Centre’s decision to introduce a Merchant Discount Rate (MDR) of 0.4% on specified UPI person-to-merchant transactions above ₹2,000. The Court, while seeking responses from the Centre, the Reserve Bank of India (RBI) and the National Payments Corporation of India (NPCI), has allowed the new framework to proceed towards its scheduled implementation from October 15. The government has clarified that approximately 96 per cent of UPI person-to-merchant transactions will remain unaffected, while person-to-person transactions will continue to be free.
Prima facie, 0.4% may not appear significant. However, this development has raised a question about the evolution of India’s digital payments journey, i.e., Are we now beginning to bring back the costs and frictions associated with digital payment products that we spent years to remove?
India’s PayTech history provides an interesting perspective.
Cash to cards
The transition from cash to cards was a significant step towards digitisation. Introduction of Credit cards (CC) improved the settlement of time-critical transactions such as payments at the restaurants, grocery stores, etc. and brought a new dimension to payments i.e., access to credit. Thus, consumers could pay without carrying cash and receive additional incentives to access credit such as rewards and cashback.
But this digital convenience came with an economic cost. Merchants accepting cards pay MDR to the acquiring bank and other participants in the payment ecosystem. As per NPCI, standard credit-card MDR typically ranges from 1.5 to 2.5%, although actual rates may vary based on merchants and the underlying arrangements.
Notably, a 2% MDR on a ₹50,000 transaction is ₹1000 for the merchant. The economic behind his cost is to provide a payment instrument offering the users a credit line and associated benefits.
Cards to UPI
Then came the gamechanger in India’s PayTech journey-UPI. It changed the equation all together as it had no merchant fee, it was interoperable, the money stayed in bank accounts, so incentive of interests was also not compromised. On top of it, even small vendors could accept digital payments simply by displaying a QR code. UPI had removed almost all frictions of the earlier innovations in the digital payments for users. Even for merchants, its acceptance eliminated the conventional MDR burden associated with cards.
This development was specifically significant in India as mass business operations have thin margins here. Referring to the scale of UPI, 24.5 billion transactions (roughly ₹29.82 lakh crore) have been processed in August 2026 alone (source: NPCI).
UPI to UPI with MDR
UPI became a success not merely by virtue of convenience, rather owing to a unique combination of features such as reasonable cost, interoperability, ubiquity and network effects.
This makes the September 28 development even more significant.
Notably, the revised framework does not imply that UPI is becoming equivalent to cards. Instead, it raises concerns about its direction and principle i.e., from zero-cost acceptance toward paid digital acceptance.
It is straightforward that the 0.4% MDR is considerably low compared to the typical MDR range of CC, and that it is subject to certain exemptions such as ₹300 cap for transactions of ₹75,000 and above, small vendors receiving up to ₹1 lakh a month through UPI QR payments.
Additionally, users are not charged a UPI fee simply because a transaction exceeds ₹2,000, rather the charge is imposed only on specific merchant transactions.
As a result, the immediate question is not whether UPI will suddenly become expensive for everyone. It will not. Instead, the more important question is ‘What will happen to the economics of digital acceptance over time?’
Let’s assume a merchant receives ₹50,000 via an eligible UPI transaction. The MDR would be ₹200 (at 0.4%). Considering this single transaction, the charge appears negligible. However, the cumulative charge will become sizable for a business that processes thousands of such transactions.
Now, the merchants will make choices. Either absorb the cost and accept lower margins or pass the cost on to customers (can be indirectly reflected in prices). Pushing customers for using alternate payment methods. Or simply welcome the change as the cost of doing business digitally.
Each of these possibilities have implications for India’s long-range digitisation tale.
Interestingly, here the comparison with CC becomes appropriate. In progression, if all the digital payment methods will acquire such costs, then their economics will become the differentiator and not the convenience. While benefits like credit access, rewards and other value-added services explain the imposition of MDRs on CCs, the original idea of UPI was unique: convenient, bank to bank digital transfers without any costs for the merchants.
Thus, the true challenge is to make sure that charging MDR on UPI should not eventually ruin the network effects that led to the digital revolution.
Nevertheless, the policymakers have a reasonable concern as the UPI infrastructure which handles enormous digital transactions is not free of cost. Thus, this ecosystem functioning at such a huge scale requires a sustainable financing framework.
Ergo, the policy issue is much larger than “whether MDR or not.” The focus should be on finding sustainable ways to finance the UPI architecture without affecting its accessibility.
Digital payments journey of India has always been about removing frictions in the existing financial systems, processes or products. From physical handling of cash to introduction of cards for digital convenience but with associated merchant costs, to development of UPI at dramatically lower costs and complexities.
Application of MDR on UPI, although at considerably lower rate than CCs, imply a transition from the zero-cost model. It therefore raises concerns about the frictions that UPI removed earlier may gradually return.
References
Indian Express (2026), Supreme Court refuses to stay fee on UPI transactions above ₹2,000, September 29.
Ministry of Finance, Government of India/PIB (2026), UPI Continues to Remain Free for Peer-to-Peer Transactions and 96% of Merchant Transactions, September 15.
Department of Financial Services, Ministry of Finance (2026), FAQs on Merchant Discount Rate (MDR) on Select UPI (P2M) Transactions, September 15.
NPCI (2026), Unified Payments Interface (UPI) Product Statistics, August 2026.
Business Standard (2026), UPI MDR explained: How new charges compare with debit, credit cards, September 16.
Reuters (2026), The hidden cost of India’s free UPI, September 29.
