India’s digital payment landscape, which witnessed exponential growth through UPI (Unified Payments Interface), may be on the verge of a policy shift. As of May 2025, government discussions and industry signals indicate a possible reintroduction of Merchant Discount Rate (MDR) fees on UPI transactions — a move that could impact both consumers and businesses significantly.
The MDR is a fee merchants pay to banks and payment service providers for processing digital payments. In January 2020, the Indian government waived MDR charges on UPI and RuPay to encourage digital transactions. While this led to widespread adoption, it also raised concerns over the long-term sustainability of this zero-fee model.
Why Is the Government Rethinking MDR?
The core issue is sustainability. Banks and payment service providers (PSPs) have long voiced concerns that maintaining and scaling digital infrastructure without transaction revenue is unsustainable. The Reserve Bank of India (RBI) and the Ministry of Finance have hinted since late 2024 at the need to revisit the zero-MDR policy.
With UPI handling over 14 billion transactions monthly (as per April 2025 NPCI data), the ecosystem requires continual upgrades in cybersecurity, server capacity, and customer service. These improvements come at a cost, and the lack of MDR revenue has forced many PSPs to rely heavily on government subsidies or cross-subsidization models.
Potential MDR Structure: What We Might See
Based on industry sources and early government deliberations, the reintroduction of MDR could be tiered. Here’s a speculative outline:
| Transaction Type | Possible MDR Fee | Who Pays? |
|---|---|---|
| P2P (Person to Person) | 0% | No charge |
| P2M (Person to Merchant) | 0.3% – 0.6% | Merchant |
| UPI AutoPay Subscriptions | 0.5% – 1% | Merchant or Platform |
| Micro-payments (< ₹200) | Likely Waived | No charge |
This structure would ensure daily users are not affected for personal transfers or small purchases, while merchants handling larger volumes would shoulder the fees.
Impact on Consumers and Merchants
For consumers, especially those using UPI for personal transfers, the day-to-day impact may remain minimal. However, merchant-based payments, including e-commerce checkouts and in-store QR scans, may start to include a service fee if businesses choose to pass MDR costs to customers.
Small and medium enterprises (SMEs), who have leveraged UPI for its zero-cost appeal, might feel the pinch. Many such businesses operate on thin margins and could either absorb the cost or increase prices. Payment gateway startups and aggregators are also likely to tweak their pricing strategies, possibly offering incentives or premium plans.
A Step Toward Payment Innovation or a Setback?
While the policy change may seem like a regression, some experts argue it’s a step toward making digital payments more robust and self-sustaining. Countries like Singapore and the UK impose nominal transaction charges and still maintain high digital adoption. India’s challenge will be to strike a balance between innovation and accessibility.
UPI’s success story remains intact — over 350 million users and growing integration with international payment systems. The reintroduction of MDR could fund better fraud detection systems, faster dispute resolution mechanisms, and improved platform reliability.
Conclusion
As of May 2025, India stands at a critical juncture in its digital payments journey. If MDR charges return, they could redefine the cost dynamics of UPI. While daily users may continue to enjoy no-cost transfers, merchants and platforms will need to recalibrate. For long-term growth, the focus should be on fairness and infrastructure investment rather than short-term free offerings.
FAQs
Will UPI become paid for regular users?
No, person-to-person (P2P) UPI transfers are expected to remain free. Only merchant transactions (P2M) might attract a fee.
What is MDR and who pays it?
MDR (Merchant Discount Rate) is a fee paid by merchants to banks or PSPs for processing digital payments. It’s not charged to customers unless the merchant adds a service fee.
When will MDR charges be reintroduced?
While there’s no official date, policy discussions suggest it could happen by Q3 or Q4 of 2025.
How will this affect small businesses?
SMEs may face higher operational costs. They might either absorb the fees or increase product prices to offset the impact.
Can merchants still use UPI without MDR?
If MDR is reintroduced, merchants would likely have to pay. However, micro-transactions and government-backed small vendors may receive exemptions.
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