Will UPI become chargeable? Government explores new model to fund payments system

The government is examining ways to make the Unified Payments Interface (UPI) financially sustainable as transaction volumes continue to rise. The Department of Financial Services is considering changes to the current zero-MDR model, according to a report by Business Standard.

Two options are being examined: bringing back the merchant discount rate (MDR) for selected high-value transactions or merchants, or introducing a tiered incentive system that would gradually reduce government support for UPI.

Two options on the table

The Finance Ministry told the Parliamentary Standing Committee on Finance that it was examining both possibilities.

“Given the sustainability of the UPI ecosystem and the burden on the Government exchequer, the Department is currently exploring two options: (i) Examining the feasibility of restoring MDR for certain high-threshold transactions/merchants; and (ii) A tiered incentive structure to phase out the government support in the next few years," the ministry said in its July 17 reply, as reported by Business Standard.

The proposal does not currently point to a blanket charge on UPI payments. The focus is on selected merchant transactions crossing a specified value.

Why is MDR being discussed?

MDR is a fee paid by merchants for accepting certain digital payments. UPI had an MDR of up to 0.30 per cent on merchant transactions until 2019. From January 2020, the government made MDR zero to encourage digital payments.

While merchants do not pay the fee, banks and payment companies still incur costs for processing and maintaining the UPI network.

The Finance Ministry has allocated Rs 2,000 crore to incentivise UPI transactions and compensate for losses linked to zero MDR. However, the industry’s estimated operational cost was around Rs 20,700 crore, according to the Business Standard report.

The parliamentary committee has warned that the gap could affect investments in areas such as cybersecurity, fraud prevention and network infrastructure.

“While statutory enablement now exists to permit calibrated MDR on high-value transactions, any delay in notifying and operationalising this framework leaves payment service providers heavily dependent on inadequate subsidies, thereby threatening critical investments in cybersecurity, fraud prevention, and network infrastructure," the committee said.

Will users have to pay for UPI?

There is no indication of a general UPI charge for consumers at this stage. Business Standard reported that Finance minister Nirmala Sitharaman said any future MDR would apply only to a limited category of high-value merchant transactions.

The government is also considering a tiered incentive model under which support could be reduced gradually rather than withdrawn at once.

The scale of UPI is central to the discussion. The parliamentary committee estimates that the platform could eventually handle 150 billion transactions a month and add around 600 million users.

No final decision has been announced yet. The UPI and Services Steering Committee headed by NPCI is expected to decide the structure of any MDR and the threshold for transactions that could attract it.