The Startup Policy Forum (SPF), a coalition of India's leading startups has endorsed an industry proposal to reinstate the Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions for large merchants.
The forum said that the reform can empower the next 500 million Indians to participate in the country's digital payments boom. It also proposed a two-tiered MDR approach, which would exempt small merchants from the fee while imposing it on larger enterprises.
"The two-tiered model of MDR ensures this balance by exempting small merchants from the proposed MDR framework and preserving the extant zero MDR framework for them. This distinction will also ensure the long-tail of small value merchants have adequate impetus to upramp and experience digital payments acceptance ensuring UPI witnesses the next wave of growth.," SPF stated.
The Proposal
Previously, the Payments Council of India (PCI) had formally written to Prime Minister Narendra Modi and the PMO, demanding a 0.3% Merchant Discount Rate (MDR) on UPI transactions for large merchants (those with annual sales exceeding ₹20 lakh).
The proposal aims to align UPI fee structures with the fees applied on credit cards and non-RuPay debit cards.
Industry stakeholders highlight that government subsidies for digital payments have consistently declined from roughly ₹3,500 crore in previous years to as low as ₹1,500 crore, making the current zero-MDR policy unsustainable over the long term.
What is MDR?
MDR is the commission that merchants pay for each transaction when customers use payment methods such as credit/debit cards, digital wallets, or online banking. This fee compensates banks and payment processors for services including transaction processing, security, and technology infrastructure management.
The MDR for UPI transactions is currently zero, that means the merchants need not pay any fee for receiving payments through this network.
According to the PCI's proposal, over 60 million retailers in India accept digital payments, primarily through UPI, with 90% of them being small merchants. Nearly all of the remaining five million large merchants already have card processing equipment or e-commerce platforms in place, enabling them to accept all types of card payments, which typically incur fees ranging from 1% to 2% depending on the card.
In December 2019, Finance Minister Nirmala Sitharaman in order to boost digital payments announced that no MDR charges would apply to RuPay and UPI transactions from January 1, 2020. Before this, merchants paid banks less than 1% of the transaction amount as MDR for UPI transactions.
This arrangement meant that banks and fintech companies (such as Google Pay, PhonePe, and Paytm) processed UPI transactions for free, with the government providing partial compensation for the associated costs.
The government had also established an incentive scheme to promote low-value UPI transactions and digital payments. The government provides a 0.15% incentive on every transaction for payments under ₹2,000. This incentive is shared among the customer's bank (the issuing bank), the merchant's bank (the acquiring bank), payment service providers, and app developers.
The Reason
Industry leaders argue that the current zero-MDR policy, originally implemented to encourage digital payments has now become unsustainable.
Given the country's widespread use of UPI, this change could have a significant impact on India's digital payment ecosystem. In February 2025, UPI processed 16 billion transactions totaling nearly ₹22 lakh crore, according to the National Payments Corporation of India (NPCI).
Providers must continuously enhance cybersecurity to counter emerging threats, upgrade technology to handle large transaction volumes, and improve merchant onboarding and support to ensure that millions of businesses operate smoothly. Moreover, maintaining compliance with evolving legal and regulatory standards demands significant resources.
Government subsidies for operational expenditures have dropped sharply from approximately ₹3,500 crore in previous years to ₹1,500 crore or less today. This steep reduction has led to a financing deficit, with estimates suggesting that maintaining and expanding the digital payments network costs roughly ₹10,000 crore annually.
Reintroducing a small Merchant Discount Rate (MDR) is seen as a way to generate a steady revenue stream. The revenue generated could then be reinvested into the system, ensuring that growth and innovation continue without excessive reliance on declining government incentives.
The Implication
Introducing an MDR on UPI transactions goes beyond a mere accounting adjustment, it could lead businesses to pass on the cost through surcharges or by raising prices. If these expenses are shifted, consumers might notice small price increases on items and services that rely on digital payments. Alternatively, some merchants might revert to cash transactions to avoid the fees, which could hinder the growth of digital payments.
From an industry standpoint, reinstating MDR is essential to maintain and upgrade the digital payments infrastructure, as it provides a steady revenue stream to support critical investments in technology, security, and customer service.
