Professors from the Indian Institute of Technology Bombay have submitted a paper that calls for a dramatic reduction in the merchant discount rate (MDR) applied to person‑to‑merchant (P2M) Unified Payments Interface (UPI) transactions. The study, authored by mathematics professor Ashish Das and former RBI official Pragya Das, recommends lowering the overall MDR from the 0.40% announced by the National Payments Corporation of India (NPCI) to just 0.08%.
Redefining the revenue split
The report proposes a new allocation of the reduced MDR. Under the authors’ plan, third‑party application providers (TPAPs) such as PhonePe and Google Pay would receive a 0.06% share, while payment service providers (PSPs) – primarily banks – would retain their current 0.02% share. This contrasts with NPCI’s draft framework, which sets the TPAP share at 0.08%.
Presently, banks that issue and acquire transactions enjoy the bulk of the revenue, collectively capturing about 70% of the MDR pool. The IIT‑Bombay authors argue that this arrangement should be scrapped, noting that banks already benefit from substantial net interest margins (NIM) earned on current‑account and savings‑account (CASA) deposits. The study cites a NIM of more than Rs 4.85 lakh crore recorded in FY26, describing it as “large and disproportionate” compensation for a limited set of free services.
Funding the UPI ecosystem
To replace the bank‑derived revenue, the authors suggest that banks set aside roughly 3% of the funds that CASA depositors forgo through lower interest earnings. They estimate this amount at about Rs 15,000 crore, which could be earmarked for operating and upgrading the UPI platform. In addition, the paper urges the Reserve Bank of India (RBI) and the central government to treat UPI as an essential service, comparable to the core‑banking‑solution (CBS) systems that have become mandatory for banks.
The study also recommends the continuation of the Payments Infrastructure Development Fund (PIDF). Extending the PIDF, according to the authors, would help payment aggregators bring more merchants onto digital platforms, thereby expanding the reach of UPI.
Addressing high‑value transaction charges and other policy levers
One of the paper’s focal points is the charge ceiling of Rs 300 on P2M UPI transactions valued at Rs 75,000 or more. The authors question the reasonableness of this cap, noting that RBI regulations require service charges to be broadly in line with the average cost of providing the service.
To mitigate the burden on merchants and consumers, the report proposes a “digital payment fee” on online purchases from e‑commerce companies. It observes that many merchants already levy charges on transactions exceeding Rs 2,000 and also accept credit‑card payments. Consequently, the authors recommend lowering the credit‑card MDR to alleviate pressure on UPI users.
The paper also calls on the RBI to rethink the policy of generous fee‑free ATM withdrawals, arguing that such allowances are harder to justify when consumers have ready access to digital payment options.
Regarding the structure of any future fee, the authors argue that the credit‑card MDR model has no clear rationale for application to UPI. They suggest that, if an ad‑valorem fee is introduced for UPI, the maximum charge should be limited to Rs 40 per transaction.
Beyond fee structures, the study recommends making it mandatory for merchants with an annual turnover of Rs 50 crore or more (approximately Rs 4 crore per month) to offer UPI as a payment option. By targeting only large merchants, the authors estimate that the resulting revenue would account for about 90% of the MDR proposed by NPCI.
Context of NPCI’s recent circular
In September, NPCI issued a circular that set a 0.4% MDR on P2M UPI transactions above Rs 2,000, with the fee to be borne by merchants. For transactions of Rs 75,000 or higher, the charge is capped at Rs 300. The circular also stipulates a flat Rs 5 fee for essential‑service transactions above Rs 2,000, such as railways, telecom, fuel and insurance. Transfers between individuals and routine merchant payments remain free. A lower MDR of 0.02% applies to capital‑market transactions, also capped at Rs 300.
NPCI framed the move as an effort to create a sustainable revenue model for the digital payments ecosystem. The IIT‑Bombay paper, however, warns that adopting the proposed MDR framework in its current form could erode public confidence in UPI, a platform the authors describe as a public digital infrastructure that has boosted economic productivity.
By emphasizing that the long‑term economic gains generated by UPI outweigh the additional revenue that could be collected through merchant fees, the report underscores the need to keep the payment system affordable and user‑friendly.
In summary, the IIT‑Bombay study calls for a steep cut in the UPI merchant discount rate, a reallocation of revenue away from banks toward the platform’s upkeep, and a suite of policy adjustments aimed at preserving the system’s inclusivity and confidence among users.
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