Understanding The Impact Of New MDR On India's UPI Ecosystem

India's Unified Payments Interface (UPI) is set to undergo a significant policy shift with the introduction of targeted Merchant Discount Rates (MDR) on high-value merchant transactions, aiming to ensure the long-term sustainability and growth of the digital payments ecosystem.

UPI has emerged as the dominant mode of retail payments in India, with its share of transaction volumes rising sharply from 73.6 per cent in FY23 to 86.8 per cent in the June quarter of FY27, CareEdge Analytics & Advisory said on Tuesday. As UPI scales, the focus is increasingly shifting towards the long-term sustainability of the ecosystem, with proposed measures around targeted Merchant Discount Rates (MDR) on select higher-value merchant transactions, it said. CareEdge said at MDR rates of 0.25â€0.50 per cent, this could translate into a potential gross revenue opportunity of Rs 15,000â€30,000 crore, with every 10 basis points of MDR generating approximately Rs 6,113 crore.

New MDR Framework For UPI Transactions

Earlier this month, Parliament passed amendments to the Payment and Settlement Systems Act, 2007, thus allowing the government to modify the zero-MDR framework on UPI transactions. As per the amendment, consumers making payments will not face any transaction charges, and all Person-to-Person (P2P) transactions will continue to be free of charge. A nominal MDR, far lower than debit or credit card MDRs, will be applicable on a limited set of merchant transactions, above a certain threshold. The 'UPI and Services Steering Committee' headed by the NPCI will decide on the MDR, if any.

Targeted Monetisation And Revenue Potential

"While the actual revenue opportunity will depend on the final eligibility criteria and MDR rate, the analysis highlights the potential for targeted monetisation of high-value P2M transactions while preserving free P2P and low-value digital payments," CareEdge Analytics & Advisory said. Payment to Merchant (P2M) transactions constitute 29 per cent of total UPI transaction value, with 67.2 per cent of P2M transaction value exceeding Rs 2,000. This implies that only 19.5 per cent of the value of overall UPI transactions potentially falls within the proposed MDR threshold as of FY26, suggesting that the framework is targeted towards a relatively narrow segment of the ecosystem, CareEdge said.

Impact On Merchant Payments And Ecosystem Growth

The share of P2M UPI transactions above Rs 2,000 has steadily increased from 15.1 per cent in FY23 to 20.1 per cent in the first quarter of FY27, reflecting a sustained shift towards higher-value merchant payments on UPI. This trend broadens the pool of transactions potentially subject to MDR, thereby creating greater revenue-generation potential for the ecosystem, although the associated cost could increase the sensitivity of merchants to payment charges, CareEdge said. "...amendment to the Payment and Settlement Systems Act is positioned as an enabling measure to develop a self-sustaining revenue framework, encourage greater participation and competition among ecosystem players, and reduce reliance on subsidies as transaction volumes increase," it added.