IIT-B report wants UPI MDR cut; says banks should forgo their share

The Merchant Discount Rate, or MDR, is a fee linked to a merchant’s digital payment transaction. It is charged when a customer pays a participating merchant through UPI. The article discusses reintroducing MDR for selected merchant transactions, especially payments above Rs 2,000.

In practical terms, the merchant bears the charge. The payment amount is processed through banks, a payment service provider and, where applicable, a third-party app provider. Under the existing arrangement described, banks collectively receive 70% of MDR revenue. The IIT-Bombay report proposes a much smaller overall MDR of 0.08%.

The proposed framework would not apply equally to every UPI payment. The article links charges to merchant payments and recommends restricting them to merchants with annual turnover above Rs 50 crore. It also questions high transaction charges, including a possible Rs 300 charge on a payment worth Rs 75,000 or more.

The article identifies 0.40% as the existing MDR rate for the merchant UPI transactions under discussion. It says NPCI proposed an MDR structure of 0.08%. The IIT-Bombay report also proposes reducing MDR to 0.08%, but it changes how that amount would be shared.

Under the report, third-party application providers would receive 0.06%, while payment service providers would retain 0.02%. The report rejects the existing 70% bank share. It also says that, if UPI adopts an ad valorem fee based on transaction value, the maximum charge should be Rs 40 per transaction.

The article does not state a separate NPCI transaction cap. It does mention a possible Rs 300 charge on a peer-to-merchant payment worth Rs 75,000 or more, calling that cap unreasonable. Thus, the clearest comparison is 0.40% versus 0.08%, alongside the report’s proposed Rs 40 ceiling.

The article distinguishes merchant payments from the broader UPI system. It says merchants covered by the UPI MDR framework already levy charges on transactions exceeding Rs 2,000. This implies that payments below that threshold would remain outside the discussed merchant-charge framework, while selected higher-value merchant payments could become chargeable.

The report proposes an additional restriction based on merchant size. Only merchants with annual turnover above Rs 50 crore would be charged, equal to around Rs 4 crore a month. The report says this structure could account for approximately 90% of the MDR proposed by NPCI. It also recommends making UPI mandatory for these large merchants.

The article does not provide a complete list of every transaction that would remain free. It focuses on merchant payments and says UPI is public digital infrastructure. The central policy choice is therefore to protect ordinary use while collecting fees from large businesses and selected higher-value purchases.

Eliminating the banks’ 70% MDR share would remove a major revenue allocation from UPI transactions. The report argues that banks already benefit from current and savings account deposits because they pay depositors relatively low interest. It calls their existing compensation large and disproportionate for providing limited services free of charge.

The proposed replacement is bank funding from CASA-related benefits. The report says banks could set aside around 3% of the funds that CASA depositors forgo through lower interest earnings. That amount is estimated at Rs 15,000 crore. It could operate and upgrade UPI instead of being distributed through MDR revenue sharing.

For merchants, the proposed overall MDR would be 0.08%, below the 0.40% figure discussed for the existing arrangement. That could limit their payment cost, especially when charges focus on large merchants. For UPI, the change would not remove operating costs; it would change who funds them and how.

Banks are involved on both sides of a UPI payment. One bank issues or holds the customer’s account, while another may acquire the merchant’s transaction. The article says banks that issue and acquire transactions currently receive the bulk of UPI MDR revenue, with a collective 70% share.

Payment service providers, or PSPs, are predominantly banks. They provide the payment services that support UPI transactions. Third-party application providers, or TPAPs, include PhonePe and Google Pay. They provide the customer-facing applications through which users initiate payments. The report recommends a 0.02% PSP share and a 0.06% TPAP share.

The article presents these participants as contributors to the UPI ecosystem, rather than as a single company. A customer uses a TPAP app, the payment service is supported by a PSP, and issuing and acquiring banks connect the accounts. The proposed revenue shares are intended to compensate these services while removing banks’ existing 70% allocation.

The report says UPI should be funded as essential public infrastructure, not mainly through MDR revenue from ordinary merchant transactions. It argues that banks already earn substantial interest margins from CASA deposits. Banks could direct part of that benefit toward operating and improving UPI.

Specifically, the report suggests setting aside around 3% of the money CASA depositors forgo through lower interest earnings. It estimates this at Rs 15,000 crore. Other proposals include continuing the Payments Infrastructure Development Fund, which would help payment aggregators bring more merchants onto digital platforms.

The report also proposes limiting merchant charges to businesses with annual turnover above Rs 50 crore. It recommends a digital payment fee for online purchases of goods or services from e-commerce companies. It further calls for lower credit-card MDR and says any value-based UPI fee should be capped at Rs 40 per transaction.

The report calls UPI a public digital infrastructure because it is a widely used payment platform that makes transactions considerably more convenient. It also says UPI improves economic productivity. Its value, according to the paper, comes from the broader economic gains it creates, which may outweigh revenue from merchant fees.

In a UPI payment, the customer initiates a transaction through a third-party app such as PhonePe or Google Pay. Payment service providers, predominantly banks, support the payment service. Banks that issue and acquire transactions connect the customer’s account with the merchant’s account. The article identifies these roles, though it does not describe every technical message or settlement step.

This structure allows money to move between bank accounts without making the platform dependent on a high fee for every payment. The report warns that an MDR framework could weaken public confidence. It therefore supports limited charges, bank support, and continued investment in the UPI ecosystem.