The government is considering a proposal to reinstate merchant fees on Unified Payments Interface (UPI)-based transactions and RuPay-powered debit cards, according to senior bank officials.
These charges, known as the merchant discount rate (MDR) in the industry, are paid by the merchant to the bank in exchange for real-time payment processing. There is currently no MDR levied on UPI and RuPay debit card transactions facilitated by the retail payments network National Payments Corporation of India.
"A formal proposal to bring back MDR on UPI payments for large merchants was sent to the Union government by the industry (banks) and now the concerned departments are considering it positively," according to a banker.
According to the lenders' proposal, the fee can be refunded for merchants with a GST-based annual turnover of more than Rs 40 lakh, the banker stated.
Affordable for large traders
He also suggested that the government implement tiered pricing for UPI based on merchant size, with larger merchants paying a higher charge and smaller merchants paying a lower one. UPI would remain free for merchants with an annual turnover of less than Rs 40 lakh, he added.
"The logic is that if large merchants who have card machines are paying MDR on other payment instruments like Visa and Mastercard debit cards and all forms of credit cards, then why can they not pay charges for UPI and RuPay debit cards?" said another banker.
Merchants had to pay banks less than 1% of the transaction amount as MDR until the government announced in the FY22 budget that the fee would be waived to encourage digital transition. Because UPI has now become the de facto retail payment mode, and RuPay has gained popularity, industry executives believe the blanket waiver can be lifted.
According to industry insiders, a large retail merchant receives more than 50% of its transactions via card, so a fee on UPI transactions should be minimal.
In February, Payments Council of India chairman Vishwas Patel stated that by offering zero charges for all categories of merchants, the government was using taxpayer funds to subsidize large merchants who can afford to pay a small fee for payment processing.
The council represents several major fintech companies.
Payment aggregators (PA) require this charge to be reinstated in order for their businesses to remain viable. "Payment companies are now subject to PA-Online rules. Their compliance costs have skyrocketed; if they can't make payments, businesses will fail," he said.
While the government provided a subsidy to banks and fintechs for free payment processing, industry insiders pointed out that it was insufficient to cover the cost of the infrastructure required to process these transactions.
In this year's union budget, the government has also reduced its payment subsidy allocation to Rs 437 crore, down from more than Rs 3,500 crore the previous year.
On February 19, it was reported that banks were still waiting for the government to pay them for subsidies from the previous year.
Fintech industry executives raised the issue of digital payment charges during their meeting with new Reserve Bank of India governor Sanjay Malhotra a week ago.
According to industry insiders, providing free UPI services results in a significant revenue loss. According to NPCI data, UPI processed 16 billion transactions in February 2025, totaling nearly Rs 22 lakh crore.
