Who has to pay MDR on UPI and who stands to gain the most?

Source: The post “Who has to pay MDR on UPI and who stands to gain the most?” has been created based on “Who has to pay MDR on UPI and who stands to gain the most?” published in “The Hindu” on 18th September 2026.

UPSC Syllabus: GS-3- Indian Economy

Context: Merchant Discount Rate (MDR) is a fee charged for processing digital payments, which is generally shared among banks, payment service providers and UPI application providers. Under the new arrangement, MDR will apply to certain Person-to-Merchant (P2M) UPI transactions above ₹2,000, while most UPI transactions will remain free.

Who will pay MDR

1. Merchants receiving UPI payments above ₹2,000 will generally bear the MDR.
2. Transactions of ₹75,000 and above will have MDR capped at ₹300 per transaction.
3. Essential and thin-margin sectors such as railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat MDR of ₹5 per transaction.
4. Transactions involving mutual funds, stockbrokers, dealers and F&O will attract 0.02% or ₹300 per transaction, whichever is lower.

Who will not pay MDR

1. P2P transactions will remain completely free.
2. Merchant payments up to ₹2,000 will remain free.
3. Small merchants receiving up to ₹1 lakh per month through UPI will be exempt.
4. P2PM transactions will also remain exempt.
5. Hence, around 97.5% of UPI transactions by volume will remain free.

Who stands to gain

1. MDR collections will be shared among banks, payment service providers and UPI application providers.
2. The payer’s bank gets about 40%, the merchant/receiving bank about 30%, UPI applications/TPAPs about 20%, and PSPs about 10%.
3. A dedicated fund equivalent to 5% of total MDR collections will also be used to promote UPI adoption among small merchants.
4. Since P2M transactions above ₹2,000 constitute around 20% of UPI transactions by value, the new mechanism can generate significant revenue for the payment ecosystem.

Challenges

1. Higher cost for merchants: MDR may increase the cost of accepting digital payments, particularly for merchants with low profit margins.
2. Risk of discouraging digital payments: Some merchants may prefer cash or other payment modes if MDR makes UPI transactions costlier.
3. Impact on small businesses: Although small merchants are exempt up to ₹1 lakh monthly UPI receipts, businesses growing beyond this threshold may face additional costs.
4. Complexity of the MDR structure: Different rates, exemptions and transaction limits may make the system difficult for merchants to understand and comply with.
5. Possibility of shifting the burden: Merchants may indirectly pass the additional cost to consumers through higher prices.
6. Revenue-sharing concerns: The distribution of MDR among banks, TPAPs and PSPs could raise questions about whether the compensation adequately reflects the costs and responsibilities of each participant.

Way Forward

1. Protect small and low-margin merchants: MDR exemptions and concessional rates should continue for essential sectors and small businesses.
2. Maintain transparency: The applicable MDR, exemptions and caps should be clearly communicated to merchants.
3. Monitor consumer impact: Regulators should ensure that merchants do not impose inappropriate additional charges on consumers for using UPI.
4. Periodic review: MDR rates, exemptions and transaction limits should be periodically reviewed based on transaction costs and the development of the digital-payment ecosystem.
5. Strengthen competition: A competitive payment ecosystem can help keep transaction costs reasonable while ensuring adequate compensation to banks, PSPs and UPI applications.

Conclusion: MDR can provide a sustainable revenue mechanism for the UPI ecosystem while retaining free access for the overwhelming majority of transactions. The way forward should be to balance the financial sustainability of digital payments with affordability for merchants and consumers, especially small and low-margin businesses.

Question: What is Merchant Discount Rate (MDR) on UPI transactions? Discuss who will bear the MDR on UPI transactions above ₹2,000. Examine the challenges associated with MDR and suggest a way forward.

Source: The Hindu