Why the Payments Council of India is Backing a Merchant Discount Rate for UPI
The Payments Council of India (PCI), which represents digital payments companies, has publicly supported the introduction of a merchant discount rate (MDR) on UPI transactions – but only for large merchants. The council argues that running a national payment infrastructure like UPI requires continuous, large-scale investment in technology, cybersecurity, fraud prevention and compliance, and that the current model, where costs are absorbed entirely by banks and payment service providers, is not sustainable as transaction volumes explode.
UPI clocked 23.65 billion transactions worth ₹29.87 trillion in July 2026 alone, up from 20 billion transactions a year earlier. PCI made clear that small merchants would remain exempt from any MDR, and that consumers would never be charged for UPI payments, whether at small or large outlets. Any merchant service charges, the council said, would be commercial arrangements between the merchant and its payment provider – a standard global practice in digital payments.
The backdrop is the Taxation and Other Laws (Amendment) Bill, 2026, passed by the Lok Sabha on 7 August. The bill amends the Payment and Settlement Systems Act, 2007, empowering the government to decide which digital payment methods stay free and which can attract charges, removing the current link to the Income Tax Act. While the RBI Governor said discussions on a specific MDR structure are still “premature”, the legislative change opens the door for such fees in the future.
What a Potential MDR Means for India's Digital Payments Ecosystem
The Cost Conundrum Behind UPI's Success
PCI's statement is essentially a call to address the economic reality of running UPI. Banks, fintechs, NPCI and the RBI have collectively invested heavily in the infrastructure that now processes billions of transactions monthly. These costs – technology upgrades, fraud detection systems, customer support, regulatory compliance – are currently borne by the ecosystem participants, with no direct revenue from peer-to-peer or small merchant transactions. As volumes soar, the financial strain on payment service providers grows, potentially threatening the system's reliability unless a sustainable funding mechanism is introduced.
Why Large Merchants Are the Target
By proposing an MDR only for large merchants, PCI draws a line between those who benefit commercially from UPI's reach and those who simply use it for personal transactions. Large merchants gain significant operational efficiencies and customer access through UPI; a small fee – negotiated commercially – could help fund the infrastructure without burdening small shopkeepers or end-users. This aligns with global models where card networks or digital wallets charge merchant fees while consumer payments remain free. The exemption for small merchants is politically astute, as it preserves the inclusive narrative of UPI that has been central to its adoption.
Regulatory and Political Trajectory
The amendment bill passed this week is a necessary legal step, but it does not mean MDR is imminent. RBI Governor Sanjay Malhotra's remarks indicate that the central bank is cautious, and any fee structure would require extensive stakeholder consultation. The government will also weigh the electoral sensitivity of appearing to tax a popular digital public good. However, the bill signals a clear policy pivot: the era of a blanket zero-charge UPI may be ending, replaced by a more nuanced framework that distinguishes between consumer necessity and commercial benefit.
How Merchants, Payment Providers, and Consumers Should Read the Signals
For large merchants and retailers: Start assessing the potential cost impact of a future MDR on UPI transactions. Even if no fee is introduced soon, the direction of policy suggests commercial arrangements could emerge. Explore commercial negotiations with payment aggregators and consider how a fee might affect pricing strategies or payment mix.
For payment service providers and fintechs: The legislative change and PCI's backing provide an opening to engage with policymakers on a fee structure that reflects actual costs. Prepare to articulate the investment case – linking service charges to system reliability, innovation, and fraud prevention – to both regulators and large merchant clients.
For small merchants and consumers: No immediate action is needed; PCI's assurance of continued zero fees for small merchants and consumers aligns with RBI and government signals. However, stay informed about any formal proposal, as definitions of "small" could shape future liability.
Risk & Opportunity Assessment
| Commercial Risk | Medium | If MDR is introduced, large merchants will face new payment acceptance costs, potentially squeezing margins or altering consumer payment behavior; payment providers will need to manage commercial negotiations and pricing models. |
| Competitive Risk | Low | A standardized MDR framework would apply broadly; the risk is in the details – how fees are structured could advantage some providers with scale or better technology, but no specific displacement is evident. |
| Regulatory Risk | High | The exact structure and scope of any MDR remain undefined, and the RBI/government could impose caps, exemptions, or compliance requirements that affect viability. Political backlash could also delay or derail implementation. |
| Reputation Risk | Medium | Any fee on UPI, even for large merchants, could be perceived as a tax on a public digital infrastructure, risking negative public sentiment and political pushback if not communicated clearly. |
| Technology Disruption | Low | MDR would not disrupt the core UPI technology but could incentivize investment in security and innovation if revenue becomes available; no transformative tech shift is immediate. |
| Commercial Opportunity | High | For payment service providers, MDR introduces a revenue stream for a service that was previously a cost center, potentially unlocking profitability and funding for better infrastructure and innovation. |
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