The debate over UPI MDR reform is no longer limited to whether merchants should pay a fee for accepting digital payments. A new study by IIT Bombay places a larger institutional question at the centre of the discussion: who should finance the payment infrastructure that banks, fintech companies, merchants and consumers increasingly depend on every day?
The study, titled UPI at a Crossroads: Reintroducing the MDR, proposes reducing the declared merchant discount rate on selected UPI transactions from 0.40% to 0.08%. It also recommends changing how the money is distributed across the payment ecosystem, removing the proposed share for banks and assigning 0.06% to third-party application providers such as PhonePe and Google Pay and 0.02% to payment service providers, mainly banks.
These are proposals, not a final government decision. The study itself advances the debate; the eventual framework will depend on the government and relevant regulators. But the recommendations are significant because they treat UPI as essential financial infrastructure rather than as a payment service whose costs can remain indefinitely disconnected from the businesses and institutions that operate it.
The pressure behind the debate is straightforward. UPI has become a routine payment channel for transactions ranging from small purchases at neighbourhood shops to payments at large retailers and online platforms. The consumer-facing experience is simple: a user scans a QR code, authenticates the payment and completes the transaction. Behind that interaction are banks, payment applications, payment service providers and other technology and operational systems that must be maintained, secured and expanded.
The funding question has become more urgent because the existing structure does not distribute these costs evenly. The IIT Bombay study argues that banks should not necessarily receive a separate share of MDR. Its reasoning is linked to the income banks already earn from current account and savings account deposits, commonly known as CASA deposits. According to the study as reported, banks recorded more than Rs 4.85 lakh crore in net interest margin from CASA deposits during 2025-26.
On that basis, the study proposes that around 3% of CASA-linked funds, or approximately Rs 15,000 crore, be used to support the UPI system. It also recommends treating UPI as an essential service for banking businesses and assigning banks a defined responsibility for maintaining and expanding the digital payment network.
This approach would shift the conversation from a transaction-by-transaction levy to a broader funding model. Instead of asking only whether a merchant should pay for a particular UPI payment, it asks whether banks, which benefit from the deposits and account relationships that support digital payments, should contribute to the infrastructure as part of their core business responsibilities.
That distinction matters for urban commerce. Digital payments are now embedded in the functioning of markets, transport-linked transactions, retail, utilities and online services. Small merchants may use QR codes because they are relatively easy to deploy, while larger businesses may integrate UPI into billing, e-commerce or account systems. Any change in the fee structure therefore has to account for major differences in transaction size, business margins and the role played by the payment itself.
The study proposes increasing the contribution of larger businesses. It recommends making UPI acceptance mandatory for businesses with annual turnover of Rs 50 crore or more and allowing a reasonable digital payment fee to be charged on online merchant payments made by such businesses. The proposal would place a greater share of the cost on large commercial users rather than on small merchants or ordinary consumers.
That recommendation also recognises that a single UPI rule may not work equally well across all categories of payments. The report highlights the complexity of the system, where utility payments, loan repayments and capital-market transactions can operate under different conditions. Share-market-linked companies have reportedly questioned whether MDR should apply when customers add money to brokerage accounts, arguing that the transaction does not directly generate income for the company.
The payment industry’s concern is that some UPI transactions cannot simply be compared with credit-card payments. Before UPI, several payments were made through net banking, IMPS, NEFT and RTGS. Applying a common fee without distinguishing the purpose and economics of each category could therefore create disputes over who is receiving value and who should pay for the transaction infrastructure.
The study’s proposed 0.08% structure attempts to create a defined cost allocation. Under the recommendation, third-party application providers would receive 0.06% and payment service providers would receive 0.02%. The proposal also suggests an ad-valorem charge, meaning a fee linked to the transaction value, with a maximum cap of Rs 40 per transaction.
A capped fee would prevent the charge from rising without limit on high-value transactions, but the supplied material does not establish how the cap would affect different categories of merchants or how regulators would define the eligible transactions. Those details are important because the impact of an MDR system depends not only on the headline percentage but also on exemptions, transaction classification, settlement rules and the party ultimately bearing the cost.
The current government arrangement, as described in the report, sets a 0.40% MDR on selected merchant UPI transactions from September 15, 2026. The charge is intended to apply to businesses rather than customers, while person-to-person payments and specified exempt categories remain outside the arrangement. The study’s proposal would therefore represent a substantial reduction in the declared rate, while simultaneously seeking to establish a more durable mechanism for financing the system.
For consumers, the immediate question is whether UPI payments will become chargeable. The study does not recommend directly charging people for routine payments. Its emphasis is on merchant payments, bank contributions and fees from larger businesses. However, whether consumers remain insulated from the cost would ultimately depend on the final rules and on whether businesses pass any operating costs through prices or service charges. The supplied report does not establish that such pass-through would occur, so it remains a policy question rather than an established outcome.
The proposed use of CASA-linked bank income is the most consequential institutional element. It would make the sustainability of UPI part of the economics of banking rather than leaving payment applications and merchants to absorb the burden. At the same time, it would require regulators and banks to agree on how the contribution is calculated, administered and monitored. The source material does not provide a detailed implementation mechanism for the proposed Rs 15,000 crore contribution.
The study also calls for continuing the Payment Infrastructure Development Fund, which supports the expansion of digital payment acceptance among new businesses. This recommendation points to a continuing infrastructure challenge: digital payment networks need not only transaction processing but also expansion to merchants that may lack the equipment, connectivity or operational capacity to participate.
The proposed reduction in credit-card MDR is another attempt to narrow the gap between different digital payment methods. The study also recommends reconsidering the prescribed limit on free cash withdrawals from ATMs. Together, these proposals indicate that the authors view payment policy as an interconnected system. Rules for UPI, cards and cash access can influence how costs and user behaviour are distributed across the banking network.
The implementation timeline adds urgency. Fintech companies and business groups are seeking an extension of the October 15 deadline to January 2027. Their stated concerns include the absence of sufficiently clear rules for different transaction categories and the difficulty of implementing changes during the festive season. Banks, aggregators and merchants have also sought more preparation time.
This timing issue reveals the administrative challenge behind the MDR debate. A payment rule can be announced centrally, but its functioning depends on banks, applications, payment processors, merchants, accounting systems and regulators interpreting the same categories in the same way. If the classification of a utility payment, loan repayment or brokerage funding transaction is unclear, disputes can emerge even when the headline policy appears simple.
The larger urban question is how essential digital infrastructure should be funded. UPI is experienced by users as a low-friction service, but its reliability depends on a network of institutions with continuing operational costs. The IIT Bombay study proposes that these costs be distributed through bank contributions, targeted merchant fees and a revised allocation among payment providers, while preserving free everyday payments for consumers.
What the evidence confirms is that UPI MDR reform remains a proposal-led policy debate, not a settled change in the payment system. The study provides a framework for reconsidering who pays, who receives compensation and which transactions should be covered. The developments to watch are the government and regulators’ response, the treatment of different merchant categories, the fate of the October 15 deadline and whether any final structure retains the stated protection for ordinary person-to-person payments.
