UPI MDR’s First Litmus Test Is The Festive Season

Over the next six weeks, India’s retailers and online businesses will process the country’s busiest transaction volumes of the year under a new fee structure. The National Payments Corporation of India (NPCI) has notified new rules for Merchant Discount Rate (MDR) on UPI transactions which will now be charged at 0.4% for transactions over ₹2000, capped at ₹300 for amounts exceeding ₹75,000.

Trade bodies are saying merchants will bleed margins. Some retailers are saying this will steer customers back to cash. A few others are claiming this will result in splitting of festive bills to duck the charges altogether. Most of these predictions assume the festive season will be UPI’s undoing. I think the opposite is more likely. The habit of paying through UPI will prove far more durable than the fee anxiety currently dominating the conversation.

The concerns are not baseless. Festive weeks account for the single heaviest selling stretch any business sees all year. As per our own data, 40% of a business’ annual sales happens during the festive weeks and within this window, the ₹2000 threshold is not a small corner of the commerce. Roughly 45% of festive transactions by count fall above the threshold and generate more than 80% of the total festive sales value. This is the segment where the 0.4% MDR applies, landing at the core of festive revenues.

Where I differ with the prevailing mood is what merchants and customers are likely to do about it. Three assumptions keep surfacing in conversations I am having and reading about.

The first assumption is that customers will drift back to cash, or that UPI usage itself will shrink. However, this is unlikely to happen. First, UPI has become the default payment option for many. UPI already accounts for roughly 85% of India’s total digital payment volume. This scale of habit is not something that changes overnight.

Second, take the example of credit cards which have always carried a fee of 1.5-2.5%. Despite the fee, India’s credit card transaction volume has been growing 24% year-on-year. If a fee three to five times higher than UPI’s has not stopped card usage from growing every year, a capped 0.4% charge is unlikely to reverse UPI.

Finally, the cost of shifting to cash is much higher for online businesses than the mere MDR on UPI. Cash-on-delivery (COD) for many online businesses is extremely expensive. Roughly a fifth to a third of COD orders in Indian e-commerce end up as return-to-origin (RTO) orders, the ones that don’t get delivered and are sent back to the business. These orders eat close to 30% of the operating costs of fulfilling that order. Because of these costs, online merchants often charge a premium for COD orders to nudge people into prepaid methods.

The second assumption is that merchants will simply split bills into two or three transactions to stay under the ₹2000 threshold. That tactic runs into a different wall online. A festive purchase on an e-commerce checkout is typically a single payment session tied to one order ID and one authentication step. Splitting it into multiple transactions would result in separate payment authorizations, more friction for the consumer, and higher chances of payment failure. Doing this might lead to a drop in customer conversion for online merchants which might be more expensive for them than the charge on UPI.

The third assumption is the one where there is a real possibility. Instead of passing the MDR directly to shoppers or blocking UPI outright, some retailers may simply trim the size or frequency of festive discounts to protect their margin. So this festive season might be a bit muted when it comes to offers.

Now coming to how this will show up in the data and UPI numbers. The MDR goes live on October 15, in the middle of the festive surge. This would lead to the October data looking unusual as the system and infrastructure adapts to the new fees. However, it shouldn't be noted as a representation of merchant or consumer behaviour.

October 2025 processed a record ₹27.28 lakh crore across 20.7 billion transactions, a 16% jump over the previous October, and that momentum carried into November with 19 billion transactions worth ₹24.58 lakh crore, up 23% in volume and 14% in value year on year. If this year's festive volumes track anywhere close to that trajectory once November's numbers are in, the fee will have proven far less disruptive than the current mood suggests.

None of this means the concerns raised by trade bodies are wrong. Margins genuinely are thin in organised retail, and a new cost landing during the busiest weeks of the year deserves scrutiny. But scrutiny and prediction are different exercises. The prediction, based on what digital payment behaviour in India has looked like for five straight festive seasons now, is that habit holds. Consumers will keep paying the way they already pay, and merchants will keep accepting the rail that, even with the fee, remains cheaper than everything else on offer.

That durability is worth placing in a longer arc. UPI won its first decade by being a mobile-first product in an India that was becoming mobile-first. Its next decade will be shaped by an AI-first shift, and staying ahead of it will depend on how many genuinely innovative companies choose to build on UPI's rails for the AI world. Commercial pricing is part of what makes that possible. It gives those companies a real reason to invest in the ecosystem and build the kind of everyday products people actually use.

Two things will show whether this worked. UPI's overall growth should keep climbing, and increasingly, that growth should come from new use cases and new companies building on the rails, beyond the ones already here.

Disclaimer: Reeju Datta is the Co-founder of Cashfree. The views expressed are personal.