UPI MDR may push costs onto consumers despite surcharge ban
An IIT Bombay report warns that the new UPI MDR framework might lead merchants to raise prices, indirectly burdening even small-value consumers.
A new report from IIT Bombay has sounded an alarm regarding the revised fee framework for Unified Payments Interface (UPI) transactions. While merchants are currently prohibited from directly passing on transaction charges to customers, the study warns that these costs could be indirectly transferred to the public through higher retail prices.
The Hidden Cost to Shoppers
The report suggests that to protect their profit margins, businesses might simply bake the Merchant Discount Rate (MDR) expenses into the general selling price of goods and services. This means that even consumers making small transactions below the ₹2,000 threshold—which are currently free—could end up bearing the financial weight of the new framework.
“UPI may lose public trust if it is floated as per the presently proposed MDR framework,” the researchers cautioned, emphasizing that the model requires significant tweaking and rationalization before it is fully implemented.
Breakdown of the Proposed MDR Framework
Under the revised structure, the following fee rules are set to apply:
- Merchant payments above ₹2,000: May attract an MDR of up to 0.40 per cent, with a maximum cap of ₹300 per transaction.
- Person-to-person (P2P) transfers: Remain free.
- Merchant payments up to ₹2,000: Remain free.
- Essential-sector transactions: A flat fee of ₹5.
- Capital market transactions: A charge of 0.02 per cent, capped at ₹300.
Massive Revenue Projections
The economic scale of this shift is substantial. Based on data from August 2026, the report estimated that merchant UPI transactions reached nearly ₹9 lakh crore, with approximately ₹6 lakh crore involving payments exceeding ₹2,000. By applying an average effective MDR of 0.25 per cent, the report projects a monthly revenue of ₹1,500 crore for payment service providers—amounting to roughly ₹18,000 crore annually.
The report also pointed out a pre-existing imbalance where UPI, debit card, and cash users may already be subsidizing credit card users. It estimated that the cost of credit card merchant fees indirectly borne by other payment users could have reached ₹26,000 crore in FY26.
Recommendations for a Fairer System
The IIT Bombay study proposed several alternatives to ensure the sustainability of the UPI infrastructure without penalizing the common man:
- Bank Contributions: Since banks earned a net interest margin of ₹4.84 lakh crore from deposits in FY26, the report suggests they should contribute approximately 3 per cent (around ₹15,000 crore annually) to sustain UPI.
- Targeted MDR: Restrict charges only to online merchants and businesses with an annual turnover exceeding ₹50 crore.
- Capping Charges: Limit the percentage-based MDR to 0.40 per cent.
- Exemptions: Protect microfinance borrowers by exempting debt collection and loan repayment transactions from MDR.
Ultimately, the report argues that a more targeted approach would allow UPI to enter its next phase of growth while keeping the consumer at the heart of the digital payments ecosystem.