Why the MDR on UPI Is Necessary and Why the Government Should Not Roll It Back

By Sunil Garodia
First publised on 2026-09-17 03:25:48

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Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator. Author of Cyber Scams in India, Digital Arrest, The Money Trap and The Human Hack

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MDR on UPI is not a tax on the poor. It is the oxygen the UPI ecosystem needs to breathe. The government must not roll it back.

The Verdict First

Zero MDR was a launch subsidy, not a permanent policy. It served its purpose when UPI needed adoption. That purpose is served. UPI now processes over 15 billion transactions a month. The infrastructure behind that scale costs money, and someone must pay for it. A modest MDR, split fairly between banks, payment apps, and acquirers, is the only sustainable way to keep the system running without taxpayer money propping it up forever.

The Delivery App Precedent

Zomato and Swiggy spent the better part of a decade burning investor cash to win market share. Free delivery, deep discounts, cash-back offers, all funded by venture capital chasing growth at any cost. That model nearly killed both companies. Losses piled up quarter after quarter. Investors grew impatient. The turnaround came only when these platforms started charging for what they actually provide: a platform fee for running the marketplace, a delivery fee for the logistics, packing charges for handling. Consumers grumbled initially. Then they accepted it, because the alternative was watching the service disappear. Today both companies report profits, and the apps still work exactly as before. Nothing was lost except the illusion that any of this was ever free.

UPI is following the same script, minus the fee. Banks, NPCI, payment aggregators, and third-party apps like PhonePe and Google Pay have absorbed the cost of infrastructure, servers, fraud monitoring, and customer support for years, all under a mandate of zero MDR imposed in 2020. This was defensible as an adoption strategy. It is not defensible as a permanent business model. No ecosystem survives on indefinite subsidy. The delivery apps learned this the hard way, through years of losses and a genuine threat of shutdown. UPI does not need to learn the same lesson twice.

The Card Network Comparison

Every credit and debit card transaction in India carries an MDR, typically between 1 and 2 percent, paid by the merchant to the card network and issuing bank. Consumers do not see this cost directly. They do not pay more at the till because a card was swiped instead of cash handed over. The merchant absorbs it as a cost of doing business, the same way they absorb rent, electricity, and staff salaries. A UPI MDR, structured the same way and capped at a reasonable rate, changes nothing for the consumer. It asks merchants, who benefit from instant settlement, reduced cash-handling risk, and higher transaction volumes, to pay a small fee for that convenience. This is not a penalty. It is a market functioning normally.

The Distortion of Zero MDR

The zero-MDR era has produced a specific distortion. Payment apps make no money from person-to-merchant transactions, which form the bulk of UPI volume. They survive on unrelated revenue streams: lending referrals, insurance sales, and cross-subsidy from other business lines. This is an unstable foundation for critical financial infrastructure. A payment system that cannot fund itself from its core function is one bad funding round away from degraded service, reduced fraud investment, or consolidation into two or three dominant players who can absorb the losses. That concentration is a bigger risk to consumers than a small merchant fee ever will be.

What Regulators Have Flagged

The RBI and the Payments Council of India have both pointed out that a fee-free system cannot fund innovation, security upgrades, or expansion into rural and semi-urban markets where transaction costs are actually higher. A modest MDR, especially if tiered so that small merchants below a certain turnover threshold remain exempt, protects the vendors the zero-MDR policy claims to protect while still generating revenue for the players who keep the lights on. This is not an either-or. It is a design question, and the exemption threshold is where the real policy debate should be happening.

The Political Optics

Rolling back MDR, or refusing to introduce it, plays well as a populist gesture. It costs nothing today and delays the bill to tomorrow. But payment infrastructure does not run on goodwill. Every server, every fraud-detection algorithm, every customer service call center costs money that has to come from somewhere. If it does not come from a transparent, market-rate MDR, it comes from taxpayer-funded subsidies to NPCI and banks, which is a less efficient and less accountable way to fund the same thing. Or it comes from banks quietly reducing investment in the system, which shows up years later as outages, fraud, and poor service, exactly when digital payments have become too important to fail.

The Case

UPI is now core national infrastructure. Core infrastructure needs sustainable funding, not a permanent subsidy dressed up as a consumer right. The delivery app industry proved that platforms which try to run on zero revenue eventually collapse or must impose fees anyway, often more chaotically and with less consumer protection than if they had planned for it from the start. Card networks prove that a merchant-side fee, structured properly, does not translate into consumer harm. The government should introduce a modest, tiered MDR now, on its own terms, rather than being forced into a messier version of the same policy later when the funding crisis becomes acute. Waiting will not make this cheaper. It will only make the eventual fix more painful.