UPI’s zero-fee model is back in focus as payment firms push for a limited merchant discount rate (MDR) on large transactions rather than across the board. Payment firms say costs are rising even as merchant acquisition slows and government incentives remain patchy, reviving the case for charging a small set of large merchants while keeping low-ticket payments free.
UPI processed 22.72 billion transactions worth ₹28.92 trillion in June, averaging 757 million transactions per day. This scale has revived questions about who pays to keep the system running. Mint explains
Why the industry wants MDR on UPI
MDR is the fee paid on a digital payment by the merchant’s side to the bank and other payment players that move the money from the customer’s account to the merchant’s account. In a typical UPI transaction, the acquiring bank handles the merchant side, the issuer bank handles the customer side, and payment service providers onboard users and apps.
Person-to-person (P2P) transfers between customer bank accounts have always been free. The government removed MDR on UPI and RuPay payments in January 2020 to speed up digital payments, while earlier debit-card MDR was at 0.90%, and UPI person-to-merchant (P2M) MDR had been set at 0.30% before the zero-fee move.
The government has supported the zero-MDR regime through incentives, but industry players say the support is still too small and too unpredictable to cover the cost of running UPI at scale. The government has reduced the financial outlay for the UPI and RuPay incentive scheme to ₹2,000 crore for FY27, a decline of nearly 10% from the revised estimate of ₹2,196 crore for FY26.
In a submission to the government in April, industry players estimated that it takes roughly ₹8,000-10,000 crore a year to sustain the UPI ecosystem. But they said the digital incentive model is unpredictable, with last year’s payout still not fully disbursed and no clarity yet on support for the next year.
“There is little incentive to take UPI deeper into feature-phone users, estimated at around 300 million devices, or into rural areas, since transaction processing costs of 50-78 paise per transaction are higher than the incentives on offer,” the submission, seen by Mint, noted.
What MDR on UPI could look like
The industry wants small merchants and low-value transactions to remain untouched while seeking a fee for a limited set of larger person-to-merchant payments. In the submission, the industry proposed charging MDR only on the top 4-6% of high-value merchants
Global equity research firm Bernstein, in its note, said the ₹2,000 threshold is central to the MDR debate because transactions above that level account for only about 4% of UPI volumes but around 67% of value, so a fee on that slice could generate meaningful revenue without disturbing everyday low-value usage.
Bernstein estimates that a 15-basis-point MDR on person-to-merchant transactions above ₹2,000 could add about $1 billion in revenue. Even so, the eventual gain would depend on how the economics are shared among banks, payment apps, merchant acquirers and NPCI.
Reeju Datta, co-founder of Cashfree Payments, said the cost of running UPI goes well beyond the core bank-to-bank rail between the acquirer and issuer. He added that a payment aggregator also has to bear merchant onboarding, KYC, integration support, compliance audits, refunds, disputes and chargebacks.
“For small merchants, onboarding and compliance take up a larger share of the cost burden, while for large merchants, disputes and chargebacks become more significant as transaction values rise,” he added.
What happens if MDR does not return?
If the government sticks with zero MDR, the burden of sustaining UPI will continue to fall on banks, payment apps and gateways, even as the pool of government incentives remains limited. That includes consumer-facing apps such as PhonePe, Google Pay, Super.money, and MobiKwik, as well as payment gateways such as Razorpay, Cashfree and Juspay, which already earn from merchant services fees and other payment-related businesses.
Those apps, meanwhile, do not depend on UPI alone for growth. They are trying to monetize their large customer base through insurance, RuPay or credit cards, BNPL or co-branded cards, cash loans and other financial products, even as the UPI-specific revenue pool stays constrained.
UPI P2M growth has also slowed sharply from the hypergrowth years. Bernstein’s charts show P2M transaction volume growth at 108% in FY22, 82% in FY23, 49% in FY24 and 37% in FY25, easing further to 24% year-on-year by May 2026. Value growth has followed the same pattern, falling from 186% in FY22 to 64% in FY24 and 42% in FY25, before slowing to 25% year-on-year in May 2026.
That is why some industry executives argue that the ecosystem will need to find ways to make the economics work without expecting a subsidy or a broad MDR revival.
“The biggest cost burden sits with banks, which have to build the real-time infrastructure for UPI, but can absorb it because they earn money from other parts of the business. But payment apps such as PhonePe and Google Pay get a large amount of customer engagement, and they should find a way to monetise that through ads or other products,” said a co-founder of a fintech app on the condition of anonymity.
For now, the government’s public stance remains cautious. A recent parliamentary finance committee’s report reopened the debate by flagging the absence of clear monetisation avenues and the slowing growth rate in UPI merchant payments, but there has been no formal move to approve MDR on UPI.
That leaves the debate where it has often landed before: between UPI as a public digital rail and UPI as a business that must pay for itself.