The Union Finance Minister and the National Payments Corporation of India are repeatedly emphasising that 96 per cent of Indians using the Unified Payments Interface will not be affected by the new Merchant Discount Rate. The government’s insistence suggests it has been rattled by growing opposition to the levy.
The latest move by NPCI to ban platform fees on UPI bill payments, opposed by third-party UPI platforms, looks like damage control after the unpleasant decision to impose a 0.4 per cent MDR on select UPI merchant transactions above Rs 2,000.
For citizens, the bigger problem is trust. In June 2025, the Finance Ministry issued a statement on X dismissing reports that MDR would be charged on UPI transactions, calling such speculations and claims “completely false, baseless, and misleading”. A year later, the government has introduced an MDR on some transactions above Rs 2,000.
The question now is: will cash become popular again?
Demonetisation offers a useful comparison. In November 2016, the government abruptly withdrew Rs 500 and Rs 1,000 notes, which accounted for about 86 per cent of currency in circulation. The move disrupted an economy in which almost 90 per cent of transactions take place in cash. People accepted the decision with little protest trusting the government’s stated overall objectives: reducing the volume of the “black economy”, increasing the tax base, and reducing funding sources for terrorist activities. Yet, demonetisation did not, by itself, reduce Indians’ preference for cash. UPI did.
The payment system, launched by NPCI in 2016, made instant bank-to-bank and person-to-merchant payments possible through a simple digital interface. UPI reportedly has 500 million users, all of whom have, to a large extent, said goodbye to rupee notes that have been in circulation since their introduction in the eighteenth century by the Bank of Hindostan (1770-1832) and the General Bank of Bengal and Bihar (1773-75). This rapid adoption of UPI makes the decision to impose MDR worth examining.
Also read: Beyond free UPI: Why the government is testing political capital over economic logic
MDR on UPI is giving rise to negative perceptions
Four arguments are being made in favour of the levy. While none address the larger concern, all have begun to influence the perception of the UPI users negatively.
First, the government says there will be no MDR on person-to-person transfers or on small merchants with monthly sales of around Rs 1 lakh. But the credibility of such assurances has been weakened by the Finance Ministry’s categorical denial of an impending MDR levy just a year ago.
Second, the government argues that the levy applies only to large merchants and high-volume transactions. But Rs 2,000 is hardly an exceptional amount for a digital transaction. More importantly, there is no guarantee that merchants will absorb the cost rather than pass it on to consumers.
Third, comparing UPI’s 0.4 per cent MDR with the 1.6-1.8 per cent typically charged on credit-card transactions is a misleading act. A credit card transaction involves a line of credit; UPI moves hard-earned post-tax money directly from the user’s bank account. The two payment systems, therefore, offer different services and cannot be compared on the basis of the percentage charged.
Finally, the argument that users should pay for UPI because it costs money to operate is wrong. While UPI is marketed as free, merchants already charge consumers convenience fees and will likely pass any new processing costs directly onto them anyway.
India’s credit-to-GDP ratio is approximately 53-55 per cent, which is relatively low compared with advanced economies. Against this backdrop, the financial data generated by UPI has considerable economic value: UPI accounted for 87.6 per cent of retail digital payment volume generated by 55.49 crore users by processing about 24.16 billion transactions. The government should weigh the long-term value of this highly dependable bank-oriented digital footprint of spending, credit input, cash flow of small entrepreneurs and credit data against the paltry revenue that MDR can generate. The latter is nothing compared to the huge credit net that the UPI has been able to create for future taxation and revenue policies.
The question that the government should ask experts is whether there can be an alternative, sustainable non-MDR revenue model? UPI reportedly requires about Rs 20,700 crore annually for infrastructure, cybersecurity and maintenance. That is roughly 7.2 per cent of the Rs 2.87 lakh crore transferred by the Reserve Bank of India (RBI) to the government. Finding a way to fund UPI without directly taxing ordinary merchant transactions should hardly be beyond the government’s capacity.
The alternative before the government
A non-MDR model need not mean that every UPI service remains free. Banks could create a dedicated fund for maintaining the payment infrastructure while keeping account-to-account UPI transactions free and charging for premium financial services, advanced merchant infrastructure, value-added services, cross-border transactions and credit repayments, including UPI-backed RuPay transactions.
There are several costs embedded in the UPI ecosystem: NPCI’s network infrastructure, acquiring banks, issuing banks, payment service providers, and third-party application providers (TPAPs). Instead of putting a charge on the basic transaction, the government could revisit the tax and revenue structures around these four cost centres.
The government has strongly denied that the MDR decision has anything to do with pressure from global credit-card companies, whose share of India’s card payments has fallen sharply — from over 90 per cent to about 60-65 per cent — following heavy competition from RuPay and UPI network. India’s credit card market is projected to expand from $251,671 million in annual purchase transaction value during 2025 to $782,052 million by 2031.Whatever the competing commercial interests, the policy question remains the same.
The government should look beyond the immediate MDR revenue — and into the real value of UPI. It would be like keeping the highway free for ordinary users and recovering the cost from commercial activity built around it.
Seshadri Chari is the former editor of ‘Organiser’. He tweets @seshadrichari. Views are personal.
(Edited by Prashant Dixit)