The Startup Policy Forum (SPF), a coalition of India's leading startups, has endorsed an industry proposal to reintroduce the Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions for large merchants.

The forum opines that this reform can help spur digital payment adoption among the next 500 million Indians. It has suggested a two-tiered MDR model that does not charge small merchants but charges bigger businesses.

"Two-tiered MDR method keeps things balanced by retaining zero MDR system for small traders and charging a fee for big companies. It will keep digital payments beneficial to small businesses while driving the next stage of UPI growth," SPF said.

The Proposal

Earlier, the Payments Council of India (PCI) had officially asked Prime Minister Narendra Modi and the PMO to introduce a 0.3% MDR on UPI transactions for high-value merchants with sales over 2 million annually.

The goal is to bring the fee structures of UPI in line with what is being charged on credit cards and non-RuPay debit cards.

Experts in the industry note that government subsidies for digital payments have reduced considerably, from approximately 35,000 million in earlier years to roughly15,000 million, rendering the current model of zero MDR unsustainable.

Understand MDR

Merchant Discount Rate (MDR) is a charge levied on businesses when they receive digital payments through credit/debit cards, online banking, or mobile wallets. It is a payment for processing transactions, security, and technology infrastructure.

As it stands today, UPI transactions have no MDR, i.e., merchants do not pay any charge for accepting payments on the platform.

PCI states that more than 60 million Indian retailers accept digital payments, of which 90% are small merchants. The balance five million big merchants usually use card payment systems already bearing MDR fees between 1% and 2%.

Finance Minister Nirmala Sitharaman scrapped MDR charges on RuPay and UPI transactions from January 1, 2020, to encourage digital transactions during December 2019. Previously, less than 1% of the transaction amount was paid by merchants to banks as MDR for UPI payments.

An incentive scheme was launched by the government to aid digital adoption with a 0.15% reimbursement for transactions up to 2,000 shared across issuing banks, acquiring banks, payment providers, and app developers.

The Rationale

Industry players contend that the zero-MDR policy, which was created to promote digital payments, is no longer cost effective.

UPI has become the fulcrum of India's digital economy, with 16 billion transactions amounting to nearly 22,000,000 million in February 2025 alone, according to the National Payments Corporation of India (NPCI).

Sustaining and scaling the UPI infrastructure involves huge investment in cybersecurity, technology upgrades, onboarding of merchants, and regulatory requirements. But government subsidies for digital payments have come down sharply, leaving a funding gap. The estimated cost of maintaining and scaling the system is about 100,000 million a year.

Reintroduction of MDR, even at a small level, would bring in a constant revenue stream to support innovation, security, and operational improvements without depending on eroding government incentives.

Potential Impact

Restoration of MDR on UPI transactions might induce some companies to transfer costs to consumers in the form of surcharges or increased prices. Or, some merchants might switch to cash transactions to escape the fees, which might slow down digital payment adoption.

But from a sectoral view, MDR is critical in ensuring and strengthening India's digital payments infrastructure. It would allow for the investments required for infrastructural expansion, increased security, and better customer service to finance, ensuring sustainability of digital payments in the long term.