MDR Proposal on High-Value UPI Transactions to Help Fintechs Recover Costs and Boost IPO Prospects
India’s digital payments sector is preparing for a significant policy shift as plans emerge to introduce a merchant discount rate (MDR) on high-value Unified Payments Interface (UPI) business transactions. The proposal aims to assist fintech platforms in offsetting heavy transaction processing expenses, encouraging sustainable revenue models, and strengthening the Initial Public Offering (IPO) readiness of several prominent financial technology companies.
What Happened
For years, payment service providers and banks across India have advocated for increased government subsidies or a structured implementation of merchant discount rates to recoup the costs associated with running payment networks. Currently, UPI transactions remain free for merchants, with market dominance concentrated heavily between Walmart-owned PhonePe and Google Pay. Under the potential new framework, the government is understood to be considering MDR application specifically on larger-value business transactions. According to insights from financial services firm Jefferies, implementing a 15 to 30 basis point MDR on peer-to-merchant transactions exceeding Rs 2,000 could generate between Rs 5,000 crore and Rs 10,000 crore in revenue for payment processors. Data shows that while transactions over Rs 2,000 constituted just 4% of overall UPI transaction volume in FY26, they represented 67% of the total transaction value.
Key Highlights
- Fintech companies and banking partners spend approximately Rs 10,000 crore to Rs 12,000 crore annually to run the UPI infrastructure, whereas government incentives cover only around Rs 2,000 crore.
- UPI currently processes nearly 23 billion transactions every month across the country.
- The introduction of MDR on high-value transactions could aid public listing prospects for companies such as PhonePe, Razorpay, PayU, PayNearby, and Innoviti.
- Merchant acquirers, who carry a major share of incremental infrastructure expenses, are expected to retain a larger portion of generated MDR revenues.
- Pine Labs Chief Executive Officer Amrish Rau noted that technology, IT, innovation, and cybersecurity costs for expanding UPI have escalated by nearly 300% over the past 12 to 24 months.
Why This Matters
The absence of a monetisation mechanism for UPI has created a high-cost environment where market presence is largely limited to deep-pocketed players, leading to a near duopoly between PhonePe and Google Pay. Enabling fee recovery through MDR allows fintech firms to offset operational and customer acquisition expenses while freeing up capital to invest in system upgrades and anti-fraud technology. Industry leaders emphasize that while fee structures on business payments can support sustainability and increase industry competition, consumer peer-to-peer transfers and end-user charges should remain zero.
What to Watch Next
The implementation of MDR on UPI remains a delicate issue due to repeated past assurances by authorities that UPI services would remain free of charge. Market observers and industry stakeholders will closely monitor how policy guidelines define high-value thresholds and revenue-sharing mechanisms between merchant acquirers, banks, and payment gateways.
Frequently Asked Questions
What is the proposed change for UPI transactions?
The proposed policy involves introducing a merchant discount rate (MDR) specifically on high-value peer-to-merchant UPI transactions, rather than imposing fees on everyday small payments.
Will individual consumers have to pay fees for using UPI?
No. Industry leaders, including Pine Labs CEO Amrish Rau, have emphasized that charges for end consumers and peer-to-peer transfers should remain at zero.
Which companies could benefit from the introduction of MDR?
Fintech firms planning or eyeing public market listings, including PhonePe, Razorpay, PayU, PayNearby, and Innoviti, stand to benefit from improved unit economics and revenue generation.
Source: Based on reporting from Times of India.