Hot take— UPI needs MDR

Overview

The National Payments Corporation of India (NPCI) published a circular on 15 September 2026 stating that it will be introducing a Merchant Discount Rate (MDR) of 0.4% on Person-to-Merchant transactions exceeding ₹2,000.

The circular received a lot of criticism from users, while some people also started spreading misinformation about it. Many argue that UPI should remain free as it has been. But I'll be honest: UPI needs MDR. Read my analysis to understand why.

What is MDR?

MDR is basically what its name suggests — Merchant Discount Rate. It is a fee deducted from a merchant's payment for using a particular payment service.

MDR already exists for debit and credit cards operating on networks such as Visa and Mastercard, with rates varying depending on the type and value of the transaction. MDR helps compensate the various entities involved in maintaining payment infrastructure and processing transactions, while also helping keep the system reliable and secure.

Without some form of revenue, maintaining large-scale payment infrastructure can become financially difficult for the companies and institutions involved.

Why does UPI need MDR?

Now, you might think: Well, Visa and Mastercard are private entities, and they don't receive funding from the government to maintain their systems, so it's justified for them to charge an MDR. But UPI is backed by the government. Why does it need to charge merchants?

The thing is, UPI is not just managed by NPCI. It is an entire payment interface that depends on multiple entities working together.

Just imagine making a payment using UPI. Firstly, there's your UPI app — let's take Google Pay as an example. Then there's your bank, which actually holds your money.

Google Pay prepares the transaction request, which you authorise using your UPI PIN. Your bank then processes the transaction through NPCI's UPI infrastructure. At the same time, the payment ecosystem relies on the technology and infrastructure operated by the various participating entities.

And this is only one side of the transaction.

On the receiving side, the merchant may be using a completely different payment provider. The money has to reach the merchant's bank through the same UPI ecosystem, with the merchant's payment provider also playing a role.

So, in a simplified UPI transaction, we have:

1. Sender's Bank

2. Sender's App / Payment Service Provider

3. NPCI

4. Receiver's App / Payment Service Provider

5. Receiver's Bank

NPCI is therefore only one part of the entire ecosystem. There are banks and private companies involved as well, many of which have to maintain expensive infrastructure to support billions of fast and secure transactions.

These companies need some way to recover their operational and infrastructure costs. If payment providers cannot even break even on the costs associated with supporting UPI, there will eventually be less incentive to continue investing in the ecosystem.

This is also why you see many UPI apps relying on advertisements and other revenue streams to generate income. India has a large number of UPI apps, including those operated by smaller companies. If supporting UPI becomes financially unsustainable for these providers, their ability or willingness to continue supporting the ecosystem could gradually decline.

And if enough participants begin reducing their support, it could eventually affect one of UPI's biggest strengths — being Unified.

MDR is paid by the Merchant only

One of the biggest pieces of misinformation being spread is that the MDR will have to be paid by consumers. That isn't true.

The MDR is deducted within the merchant-side payment ecosystem before the money is credited to the merchant's bank account. Consumers are not supposed to separately pay the MDR, and NPCI has instructed that the MDR should not be added to the consumer's invoice.

Now, users have also suggested that merchants may simply increase their prices to offset the additional cost — for example, by increasing the price of a meal.

Well, that is certainly possible. If an additional operating cost affects a merchant's margins, they may eventually factor that cost into their pricing. But that is different from the consumer being directly charged an MDR on their UPI transaction.

Most payments are MDR-exempt

MDR is only applied to Person-to-Merchant (P2M) payments, which are payments made to businesses when purchasing a product or service. Regular Person-to-Person (P2P) payments will remain free.

The Ministry of Finance has stated that approximately 96% of all P2M transactions will remain MDR-exempt. Small businesses earning up to ₹1 lakh per month are also exempt under the specified conditions.

So, when does MDR actually apply?

For eligible P2M transactions exceeding ₹2,000, the MDR is 0.4%. That means a ₹2,500 transaction would attract an MDR of ₹10. For transactions of ₹75,000 or more, the MDR is capped at ₹300.

These charges are relatively small when compared with some existing card-payment charges. For example, the MDR for Visa Debit is 0.40% for payments below ₹2,000 and 0.90% for payments above ₹2,000, with no cap.

Conclusion

I feel that NPCI has made a reasonable decision by introducing a relatively limited MDR on specified merchant transactions so that the UPI ecosystem can remain financially sustainable for the organisations maintaining it.

Yes, the introduction of MDR after UPI has been free for consumers for so long does create a psychological shift. It naturally makes people question why a system that has always been free suddenly needs a charge.

But sometimes, charges aren't introduced because they are wanted — they are introduced because they are needed to keep an ecosystem sustainable.

Thank you for reading our Blog,

This is Noah Rodrigues for ByteSync Network, signing out.

References:

1. UPI Payment flow chart: https://www.pib.gov.in/PressNoteDetails.aspx?ModuleId=3&NoteId=154912&reg=48&lang=2

2. Images (Excluding flow chart): https://www.magnific.com/app

NPCI Disclaimer:

This analysis is independent of NPCI and has not been authorized, endorsed, sponsored, or otherwise approved by NPCI or its affiliates.

Trademark Notice:

"NPCI", "UPI", and "National Payments Corporation of India" are trademarks of the National Payments Corporation of India. All other trademarks are the property of their respective owners.

25.09.2026