The UPI system in India, which has been operational for a year, has evolved from initial user confusion to becoming an indispensable tool, especially during the lockdown. Today, UPI is not just a convenience but a necessity for most citizens, as the use of cash has decreased for both small purchases and online shopping.
The Unified Payments Interface (UPI) system has gained widespread global recognition, with the government playing a significant role in its development. To stimulate digital payments and promote UPI and RuPay cards, the government introduced a 'zero MDR' (Merchant Discount Rate) policy starting January 1, 2020, making UPI usage free for all merchants.
However, there are currently intensifying debates about the possible reintroduction of MDR on UPI transactions. The government is developing a legal framework to introduce a limited fee (MDR) on large transactions for select merchants, taking into account the costs incurred by banks and fintech companies for server maintenance and loss coverage. Questions are arising regarding the reasons for this move, potential external pressure, and the consequences for ordinary consumers.
Nevertheless, the government has emphasized that transactions through UPI will remain free for regular consumers. The fee will apply exclusively to transactions involving large traders/stores; meaning, the MDR falls on the seller, not the customer. Finance Minister Nirmala Sitharaman stated in parliament that the MDR commission will only apply to merchants, while UPI usage for the public will remain completely free. She also clarified that the final decision on introducing or the rate of MDR has not yet been made and will be reviewed by the 'UPI and Services Management Committee' within NPCI.
The government's argument is that implementing MDR will strengthen the digital infrastructure and provide financial support to payment aggregators for new investments. Since banks and fintech companies spend vast sums processing millions of UPI transactions, and zero MDR negatively impacted their business model, introducing MDR is intended to generate revenue to bolster these companies.
MDR is defined as the fee paid by a merchant to banks and payment service providers such as PhonePe, Paytm, and Google Pay for accepting digital payments from customers.
Brokerage firm Jefferies predicts that if an MDR commission of between 0.15% and 0.30% is introduced on large transactions exceeding 2000 rupees, the majority of the revenue will go to companies connecting sellers. This would significantly improve the financial health and income of payment aggregators like Paytm, PhonePe, and Google Pay.
At the same time, the economic research center Global Trade Research Initiative (GTRI) believes that India should not succumb to external pressure regarding its digital payment system. GTRI notes that Indian systems, such as UPI and RuPay, have successfully steered digital transactions onto a new path, and changing the system to accommodate the interests of foreign companies is undesirable.
GTRI's statement came amid the passage of a bill amending the 'Payment and Settlement Systems Act, 2007' in the Lok Sabha. This act will grant the central government the authority to determine which electronic payment methods will be subject to charges and which will remain free. GTRI advises the government to seek alternative funding sources to strengthen digital infrastructure rather than applying MDR to all traders, suggesting options such as budgetary allocation or limited fees for large commercial operations.
GTRI mentioned in its report the 2026 report from the US Trade Representative (USTR), which criticized not only UPI and RuPay but also Brazil's Pix system. The US argues that such domestic payment systems do not provide equal opportunities for foreign payment companies. However, despite USTR's accusations, American companies PhonePe and Google Pay hold over 80% of the UPI market share in India. The zero MDR policy forced these giants to bear huge costs for UPI infrastructure, servers, and security without receiving any income. Introducing MDR could start generating billions of dollars in direct annual revenue.
Furthermore, American companies Visa and Mastercard have long expressed concerns about the Indian government's zero MDR policy. Since most merchants prefer free UPI over credit and debit cards, introducing MDR on UPI could narrow this gap between payment methods, which in turn may increase the business of Visa and Mastercard.
