India's Union Ministry of Finance has moved to enable Merchant Discount Rates (MDR) on UPI transactions, proposing to scrap the zero-MDR provision that has governed the country's flagship instant payments network since January 2020. New legislation introduced this week lays the legal groundwork for a potential overhaul of the zero-merchant-fee regime, though the bill itself does not impose charges or specify which transactions would be affected, leaving those details to subsequent rule-making. (Mint, TechCrunch)

The timing is shaped by sheer scale. UPI processed a record 23.66 billion transactions worth ₹29.88 trillion (about $313.4 billion) in July 2026, according to the National Payments Corporation of India (NPCI). The network has grown into the backbone of India's digital economy, and sustaining that volume without a revenue mechanism has been a point of contention for years among the finance ministry, the Reserve Bank of India, and payment companies. (TechCrunch)

India scrapped merchant discount rates on UPI in January 2020 to accelerate adoption. That policy succeeded in driving volume, but it also meant that banks and payment apps processing the transactions bore the infrastructure costs with no compensating revenue from merchants. Walmart-owned PhonePe and Alphabet's Google Pay together account for nearly 80% of UPI transaction volumes, according to NPCI data, concentrating the cost burden in two players. (TechCrunch)

The proposal follows years of argument between India's finance ministry, its central bank, and payment companies over how to fund the fast-growing network. Pine Labs chief executive Amrish Rau welcomed the move, saying the industry needs to recover part of its investments from merchants while keeping consumer and peer-to-peer payments free to put UPI on a more sustainable footing. (TechCrunch)

Jefferies estimated that introducing merchant charges on higher-value UPI transactions could generate an additional ₹50 billion to ₹100 billion (about $525 million to $1.05 billion) in annual revenue by fiscal 2028, assuming a fee of 15 to 30 basis points. The Economic Times reported that Indian officials were considering limiting any merchant charges to larger merchants rather than applying them across all UPI transactions. (TechCrunch)

The targeting logic is clear in the data. Bernstein reported that UPI transactions above ₹2,000 (about $21) account for only about 4% of payment volumes but nearly 70% of transaction value. Any tiered fee structure applied to higher-value transactions would capture the bulk of the monetary flow while leaving the vast majority of individual payments untouched. (TechCrunch)

The broader context here matters beyond India's borders. UPI is live in Singapore, the United Arab Emirates, and France, among other countries, and NPCI has been actively expanding the network's international footprint. A sustainable funding model could influence how other nations evaluating UPI-style real-time payment rails think about cost recovery and merchant participation. (TechCrunch)

The RBI's existing MDR framework for debit card transactions offers a precedent for tiered rates. Under rules rationalised in 2017, the RBI caps MDR for small merchants (turnover up to ₹20 lakh in the previous financial year) at no more than 0.40%, with a per-transaction cap of ₹200. MDR for larger merchants is set at higher rates based on merchant category. Whether UPI merchant fees would follow a similar structure remains to be determined in subsequent rule-making. (RBI)

NPCI itself operates as an umbrella organisation facilitating UPI payments, Bharat Bill Pay, RuPay cards, FASTag, and the National Automated Clearing House (NACH), which handles high-volume interbank electronic transactions for subsidies, salaries, and collections. UPI is one pillar of a broader payments infrastructure stack that the Indian state has built and subsidized. (NPCI)

The legislation's deliberate vagueness is worth flagging. By establishing the legal authority to impose MDR without specifying rates, thresholds, or merchant categories, the government retains maximum flexibility to calibrate the regime through notification, likely after further consultation with stakeholders. That approach allows for course correction but also prolongs uncertainty for payment companies and merchants trying to model the financial impact.

For the two dominant UPI apps, PhonePe and Google Pay, the prospect of MDR revenue could materially shift unit economics. Both have operated at scale without direct transaction-based revenue from UPI, relying instead on cross-selling financial products and services. A fee of 15 to 30 basis points on higher-value transactions, as Jefferies modeled, would not transform their businesses overnight, but it would introduce a revenue stream tied directly to the payment activity they facilitate.

The risk, of course, is that even a narrowly targeted fee dampens merchant enthusiasm for UPI at the margin, particularly for mid-size businesses that sit just above whatever threshold the government sets. India's zero-MDR policy was a deliberate adoption accelerant, and any move away from it carries the possibility of friction. Whether the targeting mechanisms under consideration, such as limiting charges to larger merchants, can thread that needle is a question the rule-making process will have to answer.

What this ultimately enables is a path toward self-sustaining infrastructure for one of the world's largest real-time payment networks. The zero-MDR era served its purpose in driving adoption to extraordinary scale. The next phase, if the legislation proceeds, will test whether India can transition UPI from a subsidized utility to a funded platform without losing the momentum that made it a global reference point for digital payments.