With a Merchant Discount Rate (MDR) on merchant UPI transactions being announced above Rs 2,000, professors at IIT-Bombay have come out with a report proposing reducing the MDR to 0.08% from 0.40%.The report’s authors, Ashish Das, a professor in IIT-Bombay’s Department of Mathematics, and Pragya Das, a former RBI official, have argued that third-party application providers (TPAPs), such as PhonePe and Google Pay, as well as payment service providers (PSPs), which are predominantly banks, should receive compensation for the services they provide.The study recommends setting the MDR share for TPAPs at 0.06%, lower than the 0.08% proposed by the National Payments Corporation of India (NPCI), while keeping the PSP share unchanged at 0.02%.Under the existing arrangement, banks that issue and acquire transactions collectively receive the bulk of the revenue, with a 70% share split between them. The report has called for this allocation to be eliminated, arguing that banks already benefit from the lower interest rates paid to current and savings account depositors.According to the study, banks recorded a net interest margin (NIM) of more than Rs 4.85 lakh crore from current account and savings account (CASA) deposits in FY26. It described this as “large and disproportionate” compensation for offering a limited range of services free of charge.“Banks earn substantial interest margins from the CASA depositors. They should use the same towards running and improving the UPI ecosystem and not rely on MDR revenue sharing from offline transactions,” it said according to PTI.The report further suggested that banks could set aside around 3% of the funds, estimated at Rs 15,000 crore, that CASA depositors forgo through lower interest earnings. This money could be used to operate and upgrade the UPI ecosystem instead of depending on MDR revenue sharing.It also urged the RBI and the government to direct banks to treat UPI as an essential service that must be offered to remain in the banking business. The report compared this with the adoption of Core Banking Solutions (CBS), which has since become a necessity for banks.The study also questioned the reasonableness of transaction charges on high-value UPI payments. A charge of Rs 300 on a peer-to-merchant transaction worth Rs 75,000 or more, it said, “raises a vital question of reasonableness of fixing such a high cap as service charge”.The report pointed out that RBI regulations require service charges to remain broadly in line with the average cost of providing the service.
Digital payment fee proposed for online purchases
The report has recommended introducing a ‘digital payment fee’ on online merchant transactions involving purchases of goods or services from e-commerce companies.It noted that many merchants covered by the UPI MDR framework already levy charges on transactions exceeding Rs 2,000 and also accept credit card payments. To address concerns that credit card users are placing an additional burden on peer-to-merchant (P2M) UPI users, the authors recommended lowering credit card MDR.The report also called on the RBI to reconsider the “retention of generous fee free ATM withdrawal allowances”. It argued that maintaining such allowances was difficult to justify when consumers have access to convenient digital payment options.In addition, the study recommended continuing the Payments Infrastructure Development Fund (PIDF). According to the report, extending the fund would help payment aggregators bring more merchants onto digital payment platforms.The report questioned the rationale for applying the credit card MDR structure to UPI transactions, stating that there appears to be “no rationale for the credit card’s MDR model to be used for UPI”. It added that if an ‘ad valorem’ fee structure, under which charges are calculated as a proportion of the transaction value, is introduced for UPI, the maximum charge should be limited to Rs 40 per transaction.UPI, the report noted, is a public digital infrastructure that has made payments considerably more convenient for users while improving economic productivity. The long-term economic gains generated by the platform outweigh the additional revenue that could be collected through fees on merchant transactions, according to the paper titled ‘UPI at a Crossroads: Reintroducing the MDR’.The authors warned that introducing the proposed MDR framework in its current form could weaken public confidence in UPI. They emphasised that the payment system should not become a source of dissatisfaction among users. The report also recommended making it mandatory for merchants with annual turnover of Rs 50 crore or more to offer UPI as a payment option.The paper proposed generating revenue for the UPI ecosystem by limiting the charges to merchants whose annual turnover exceeds Rs 50 crore, equivalent to around Rs 4 crore a month. Such a structure would account for approximately 90% of the MDR proposed by the National Payments Corporation of India (NPCI), it said.The report also observed that NPCI could introduce a reasonable charge, within the existing legal framework, on all online person-to-merchant (P2M) UPI transactions.
What does the NPCI’s MDR circular say?
Under a circular issued by NPCI last month, a merchant discount rate of 0.4% will apply to person-to-merchant UPI transactions exceeding Rs 2,000.The fee will be borne by merchants rather than consumers. For transactions worth Rs 75,000 or more, the charge will be capped at Rs 300.Transfers between individuals and most routine payments to merchants will continue to be free. However, transactions above Rs 2,000 for essential services, including railways, telecom, fuel and insurance, will attract a flat fee of Rs 5 per transaction.A lower MDR of 0.02% will apply to capital market transactions, including mutual fund investments and stockbroking, with the fee capped at Rs 300.NPCI, which operates the UPI platform, issued the circular on September 15, introducing MDR on specified UPI transactions. The stated objective of the move is to establish a sustainable revenue model for the digital payments ecosystem.