UPI’S FUTURE: A BIG QUESTION MARK IN THE WAKE OF MDR

 

By Murthy ASR | Business & Economy Analysis | 3 October 2026

UPI’s next phase will test the balance between affordability, scale and ecosystem sustainability.

The question behind the fee

For years, UPI has been one of the simplest propositions in Indian finance: scan a QR code, enter the amount and pay. The transaction feels almost frictionless because the consumer has generally not had to think about the economics behind the payment.

That model is now entering a new phase. From 15 October 2026, a 0.4% Merchant Discount Rate (MDR) will apply to specified person-to-merchant (P2M) UPI transactions above ₹2,000. The policy does not impose a charge on person-to-person transfers, and the government says payments to merchants up to ₹2,000, along with transactions covered by the zero-MDR framework for small merchants, will remain free. The government estimates that about 96% of P2M transactions will remain unaffected. citeturn0search7turn0search11

First, what MDR actually changes

MDR is not a tax collected by the government. It is a fee within the payment ecosystem and is distributed among participants such as banks, payment service providers and UPI application providers. Under the new framework, the standard MDR for specified P2M transactions above ₹2,000 is 0.4%, with a cap of ₹300 for transactions of ₹75,000 and above. Certain essential and thin-margin sectors have a flat ₹5 MDR, while capital-market transactions have a separate 0.02% rate capped at ₹300. citeturn0search7turn0news33

Small merchants receiving up to ₹1 lakh a month through UPI QR are to continue receiving zero-MDR treatment across their transactions under the small-merchant framework. That distinction matters because the policy is not simply a blanket return to charging for every UPI payment. citeturn0search11

Why the economics of UPI matter

UPI has become infrastructure rather than merely another payment product. NPCI recorded 24,508.96 million UPI transactions in August 2026, worth ₹29,82,355.95 crore, with 752 banks live on the platform. citeturn0search0

At that scale, the question is no longer only how convenient UPI is. It is also how the system pays for the banks, technology, fraud controls, cybersecurity, customer support and infrastructure required to keep a national payments network reliable.

India has previously addressed this economic problem through public support. For FY2024-25, the Union Cabinet approved a ₹1,500 crore incentive scheme for low-value BHIM-UPI P2M transactions, with an incentive of 0.15% for qualifying transactions up to ₹2,000 made to small merchants. Government payouts to support the ecosystem had already run into thousands of crores in preceding years. citeturn0search1turn0search2

The case for MDR

The strongest argument for selective MDR is sustainability. If payment companies and banks receive a defined revenue stream from larger merchant transactions, they have an additional commercial incentive to invest in capacity, security, reliability and product development. The government's stated objective is to support UPI's long-term sustainability while protecting consumers and small merchants. citeturn0search7turn0search10

There is also a difference between charging for a high-value commercial transaction and charging for everyday small payments. By concentrating MDR on specified higher-value transactions and exempting small merchants and many essential categories, the framework attempts to put the economic burden away from the most price-sensitive part of the ecosystem.

But the concerns are equally important

The first concern is merchant behaviour. The rules say customers should not be charged MDR directly. Yet businesses still make economic decisions. A merchant facing a new payment cost may respond through pricing, payment preferences, or a greater willingness to accept other payment methods. Whether such indirect effects become significant is an empirical question that will only become clearer after the new regime has operated for some time. Reuters has reported concerns from market participants about possible indirect cost pass-through, while the official framework prohibits transferring MDR to consumers as a direct charge. citeturn0news32turn0search7

The second concern is competition. UPI's scale has been built around a highly competitive app ecosystem. Reuters reports that PhonePe and Google Pay together account for roughly 80% of UPI transactions. A new revenue pool could strengthen large incumbents as well as improve incentives for smaller players, depending on how the revenue is distributed and how aggressively firms compete for merchants and users. citeturn0news35

The third concern is precedent. Once a payment network develops a revenue model, the future debate may shift from whether MDR exists to where the boundary is drawn: which transactions qualify, what rates are sustainable, and whether future changes could affect categories that are currently protected.

What should not be confused

The new MDR should not be described as a universal 'UPI fee'. P2P transactions remain free, and the government says the overwhelming majority of P2M transactions will remain unaffected. Nor is MDR the same thing as GST on the transaction itself. Government clarification in 2025 noted that GST applies to charges such as MDR where applicable; it also rejected claims at that time that a GST on UPI transactions above ₹2,000 was being proposed. citeturn0search6

The bigger question: what happens to UPI next?

The real test will be behavioural and financial. Will merchants continue to prefer UPI for larger payments? Will banks and payment companies invest more because the economics improve? Will competition remain intense? Will consumers remain insulated from the cost? And, most importantly, will the new model strengthen the infrastructure without weakening the simplicity that made UPI a mass-market habit?

There is no reason to assume that MDR will either destroy UPI or automatically solve its economics. The evidence will come from transaction growth, merchant acceptance, pricing behaviour, service quality, competition and the financial performance of the ecosystem after implementation.

That is why the future of UPI is best viewed not as a verdict, but as a question mark. India has already demonstrated that it can build a payments system at extraordinary scale. The next challenge is to prove that the system can remain affordable, competitive and innovative while also becoming economically sustainable.

At a glance

• 15 October 2026: new MDR framework takes effect.

• 0% MDR: P2P UPI transactions remain free.

• 0.4% MDR: specified P2M transactions above ₹2,000.

• ₹300 cap: MDR for transactions of ₹75,000 and above.

• ₹5 flat MDR: specified essential/thin-margin sectors.

• 0.02% MDR: specified capital-market transactions, capped at ₹300.

• Small merchants: zero-MDR treatment continues under the stated framework.

• August 2026 UPI: 24.51 billion transactions worth about ₹29.82 trillion.

Sources

NPCI — UPI Product Statistics (August 2026).

Press Information Bureau, Ministry of Finance — UPI Continues to Remain Free for Peer to Peer Transactions and 96% of Merchant Transactions, 15 September 2026.

Press Information Bureau, Ministry of Finance — No Charges for UPI Users / long-term sustainability framework, 8 August 2026.

Press Information Bureau, Ministry of Finance — Incentive Scheme for Promotion of Low-Value BHIM-UPI Transactions, 19 March 2025.

Reuters — India’s UPI fee shake-up: What changes and why it matters, 16 September 2026.

Reuters — Big to get bigger: India’s UPI fee shift to entrench dominant incumbents, 22 September 2026.

Reuters — The hidden cost of India’s free UPI, 29 September 2026.