India reportedly moves to restore UPI merchant charges, reshaping payments economics
A proposed amendment to the Payment and Settlement Systems Act could reintroduce MDR on UPI transactions. Banks may be the biggest beneficiaries, while PhonePe and Google Pay could gain new revenue streams and merchants face higher digital-payment costs. No rate or rollout date has been announced.
What happened
India is reportedly preparing to amend the Payment and Settlement Systems Act to restore merchant charges on UPI. Banks, especially HDFC Bank, SBI and ICICI
Key facts
- Zero MDR for UPI and RuPay debit cards has applied since January 2020
- Estimated merchant MDR pool: Rs 2,038 crore to Rs 152,000 crore annually
- Assumed MDR range: 0.02% to 1.5%
- Estimated PhonePe-initiated transaction pool: Rs 1,000 crore to Rs 75,000 crore annually
- Estimated Google Pay-initiated transaction pool: Rs 683 crore to Rs 51,000 crore annually
- PhonePe and Google Pay account for 83% of UPI activity
Why this matters
Payments and retail strategists should reassess partnerships, acquiring economics, and merchant-service acquisitions as MDR could make UPI payment flows commercially monetizable again.
What to watch
- Publication of draft Payment and Settlement Systems Act amendment language and whether it explicitly authorizes or mandates UPI MDR.
- Finance ministry, RBI, and NPCI statements distinguishing merchant UPI from person-to-person UPI and identifying any transaction or merchant-size thresholds.
- Announcement of MDR rate caps, interchange allocation, merchant discount exemptions, or government subsidy replacement plans.
- Union Budget or fiscal documents showing changes to incentives for banks, payment service providers, or UPI infrastructure.
- Merchant-association responses, especially from kirana, restaurant, e-commerce, and retail trade groups.
- UPI transaction-growth data, bank complaints about operating costs, and any change in payment-app merchant monetization disclosures.
- Political reaction ahead of major elections, which could make broad merchant charges harder to implement.
- Banks and payment industry groups will lobby for a sustainable MDR structure, seeking clarity on rate caps, issuer-acquirer allocation, and treatment of small merchants.
- PhonePe, Google Pay, Paytm and other UPI participants will position MDR as necessary for payment-system investment while emphasizing that consumer UPI transfers should remain free.
- Large retailers, marketplaces, quick-commerce platforms, and merchant associations will quantify acceptance-cost exposure and seek turnover-based exemptions or caps.
- Acquirers and payment aggregators may revise merchant-contract language, pricing systems, and settlement infrastructure in preparation for a rule change.
- Merchants may accelerate alternatives that reduce payment cost, including direct bank-transfer prompts, wallet balances, credit-on-UPI products, loyalty incentives, and selective cash discounts.
- RBI, NPCI and the finance ministry may explore a hybrid framework in which high-volume or commercial UPI use carries charges while small-ticket and small-merchant transactions retain subsidies.