MDR on UPI likely for merchants, not users, says Bernstein report

A Bernstein report notes that if an MDR is levied on UPI, merchants will likely bear the cost, not consumers. A 30-40 bps charge is probable, with exemptions for small merchants, potentially boosting payment platform profits by 20-30%.

If the government eventually introduces a Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions, the charges are likely to be borne by merchants while remaining free for consumers, with exemptions for small merchants and low-value transactions similar to the existing RuPay credit card-on-UPI framework noted a report by Global brokerage firm Bernstein.

In its report following an investor webinar on UPI monetisation, Bernstein said a merchant-funded MDR of 30-40 basis points (bps) appears to be the most likely outcome if the government decides to permit such charges. "Based on debit card MDR benchmarks, RBI cost estimates, and comparable payment instruments, we believe an MDR of 30-40bps is the most likely outcome," the brokerage said.

Legislative Context and Government Empowerment

The observations come amid policy discussions following the introduction of the Taxation and Other Laws (Amendment) Bill, 2026, which proposes changes to the Payment and Settlement Systems Act to remove UPI's automatic statutory exemption from MDR. While the proposed legislation does not levy MDR, it would empower the government to notify which digital payment modes remain exempt from merchant charges.

The Case for UPI Monetisation

According to Bernstein, UPI transactions continue to impose technology, infrastructure and processing costs on banks, the National Payments Corporation of India (NPCI) and payment platforms. However, these costs have historically been offset by broader ecosystem benefits, including lower ATM usage for banks, reduced currency handling costs for the government and greater digitisation benefits for merchants.

"There is a credible case for retaining the current framework. That said, the need for payment platforms to monetize their infrastructure investments, combined with recent policy discussions, has brought the MDR debate back into focus," the report said.

Potential Monetisation Framework

The brokerage noted that transactions above Rs 2,000 account for only around 4 per cent of UPI volumes but nearly 70 per cent of transaction value, making them the most practical starting point for monetisation while limiting disruption to overall payment volumes.

Bernstein estimated that under a 40 bps MDR regime, with payment platforms retaining around 5 bps, the ecosystem could generate a profit pool of nearly Rs 30 billion with minimal incremental costs. It added that such a framework could expand payment platforms' net revenue pools by about 20 per cent, while profit before tax for individual platforms could increase by roughly 20-30 per cent.

Impact on Small Merchants

At the same time, the report cautioned that an MDR on UPI could raise costs for small merchants by around Rs 150 per month, equivalent to nearly two to three times the monthly subscription fee for a UPI payment device. While this could improve merchant acquisition economics and encourage new entrants, it may also limit the gains retained by incumbent payment platforms.

Future Outlook for Payment Platforms

Summarising discussions from the investor webinar, Bernstein said lending is expected to remain the primary earnings driver for payment platforms, with MDR serving as an incremental profitability lever rather than the core revenue source. (ANI)

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