Service charge on UPI transactions makes sense

Source: The post “Service charge on UPI transactions makes sense” has been created based on “Service charge on UPI transactions makes sense” published in “The Hindu” on 6 August 2026. Service charge on UPI transactions makes sense.

UPSC Syllabus:  GS-3-Economy

Context: The Finance Ministry has proposed an amendment to the Payment and Settlement Systems Act, 2007 to empower the government to levy the Merchant Discount Rate (MDR) on one or more electronic payment modes, including UPI. The proposal aims to create a sustainable digital payment ecosystem while safeguarding financial inclusion.

Arguments in favour of levying MDR

1. It will ensure the financial sustainability of the UPI ecosystem: The current zero-MDR regime places a financial burden on banks and payment service providers, reducing their ability to invest in payment infrastructure.
2. It will help meet the rising operational costs: UPI processes more than 21.7 billion transactions every month worth over ₹28.33 lakh crore, requiring continuous investment in servers, cybersecurity, and fraud prevention systems.
3. Government incentives are insufficient: The government incentives cover only around 11% of the industry’s operational costs and compensate for only 14% of the MDR revenue forgone, leaving a significant funding gap.
4. It will support future technological expansion: A sustainable revenue model will help finance future developments such as 5G integration, cross-border UPI services, and infrastructure upgrades.
5. It will follow the existing payment system model: Electronic payment systems such as NEFT and RTGS already recover charges from users, and these charges have not discouraged the adoption of digital payments.
6. Large commercial users can bear a nominal charge: Large merchants derive direct business benefits from UPI’s speed and reliability and can reasonably contribute towards maintaining the infrastructure.

Concerns

1. It may discourage small merchants from accepting digital payments: Even a small service charge may encourage small vendors to shift back to cash transactions.
2. It may affect financial inclusion: Since India’s Financial Inclusion Index is around 67%, imposing charges on all transactions could slow the growth of digital payments.

Way Forward

1. Small-value transactions should remain exempt from MDR: Exempting low-value transactions will protect small merchants and preserve digital payment adoption.
2. A tiered MDR system should be introduced: The government should levy a nominal MDR only on high-value commercial transactions while keeping low-value transactions free.
3. The burden should be shared between the government and industry: Government incentives should continue for financial inclusion, while large commercial users should contribute towards maintaining the payment ecosystem.
4. The policy should balance inclusion with sustainability: The MDR framework should ensure that UPI remains affordable for small users while providing adequate revenue for long-term infrastructure development.

Conclusion: UPI has emerged as a critical digital public infrastructure for India’s economy. However, its long-term growth requires a sustainable funding model. A tiered MDR structure, which exempts small-value transactions and imposes a nominal charge on high-value commercial payments, can balance financial inclusion with the financial sustainability of the digital payment ecosystem.

Question: Should Merchant Discount Rate (MDR) be levied on Unified Payments Interface (UPI) transactions? Discuss the need for a sustainable revenue model while ensuring financial inclusion.

Source: The Hindu