Don't put a toll on UPI: Why merchant discount rate isn't the answer

Reports that GoI is considering a merchant discount rate (MDR) on UPI payments made to businesses with annual turnover of ₹1-1.5 cr, and only on transactions above ₹2,000, deserve scrutiny.

The concern behind the proposal is legitimate. Banks, payment service providers and tech companies incur expenditure on cybersecurity, settlement, fraud management, customer support and system resilience. The Parliamentary Standing Committee on Finance, citing evidence submitted by department of financial services, noted that current government incentives cover only about 11% of industry costs, and recommended that GoI develop a sustainable revenue model for the UPI ecosystem rather than relying indefinitely on budgetary support.

But reintroducing MDR may not be the only answer. It would dilute one of India's most successful ease of doing business (EoDB) reforms: a universal, interoperable and frictionless payment system whose price is known in advance: zero. For a merchant, UPI is not merely another payment option. It is now basic commercial infrastructure, comparable to a bank account or an electronic invoice. Adding a turnover-based and transaction value-based charge would replace simplicity with classification, monitoring, reconciliation and disputes.


The proposed threshold is especially problematic. Turnover is not profit. A retailer, fuel outlet, pharmacy, distributor or restaurant may cross ₹1 cr in sales while operating on thin margins. A sharp threshold creates a regulatory cliff: the same transaction is free on one side of an annual-turnover line and chargeable on the other.

Businesses would need rules for franchise networks, marketplaces, multiple GST registrations, refunds, cancelled orders, split payments and mid-year threshold crossings. Such complexity is inconsistent with GoI's objective of reducing disproportionate compliance costs and improving regulatory predictability.

Policy stability matters because digital networks depend on confidence and scale. Millions of enterprises adopted UPI, redesigned billing systems and trained staff based on a national policy. Altering that bargain after adoption would signal that foundational digital rules may change once businesses are locked in. EoDB requires more than fewer licences. It requires the state to avoid turning successful public infrastructure into an unpredictable recurring cost.

There is also a statutory issue. Section 10A of the Payment and Settlement Systems Act prohibits banks and system providers from imposing, directly or indirectly, a charge on persons making or receiving payments through prescribed electronic modes. UPI's zero-charge framework is not a casual concession - it rests on legislation. Any reversal should come only through a transparent legislative process, supported by published evidence and meaningful consultation, not through an opaque workaround.

MDR will also not remain confined to 'large merchants' in economic effect. Costs are passed through. Merchants may raise prices, withdraw discounts, prefer cash, impose convenience fees or encourage customers to fragment transactions. Even a modest rate creates a precedent for future escalation. The resulting friction would be borne by consumers, suppliers and smaller enterprises linked to larger businesses.

The answer is not to deny ecosystem costs but to fund them intelligently.

Study first

RBI can commission an independent activity-based cost study across banks, NPCI, acquirers and payment applications. RBI has previously, in its discussion paper on charges in payment systems, identified both subsidisation and value-neutral charging as questions requiring examination.

Create a fund

GoI could establish a Digital Payments Sustainability Fund, with predictable budgetary support and outcome-linked disbursements. Payments should reward uptime, fraud prevention, grievance resolution, accessibility, rural expansion and small-merchant activation. This converts subsidy from an entitlement into a public-service contract.

Optional charges

Providers should be free to charge competitively for optional value-added services like analytics, premium reconciliation, credit, insurance, hardware and customised enterprise integrations, while the core UPI payment remains free. Innovation should earn revenue, access to the national payment rail should not become a tollbooth.

India must not choose between merchant affordability and provider sustainability.

Sound policy can protect both. GoI should retain zero MDR for core UPI, create a transparent cost-recovery framework, and review it periodically through public consultation. That approach would preserve EoDB, honour legislative predictability and ensure that every participant - consumer, merchant, bank, fintech and GoI - continues to benefit from India's most consequential DPI.

The writer is former president, Society of India Law Firms