The impact of a possible Merchant Discount Rate (MDR) on UPI will vary across payment companies depending on their merchant base and transaction mix, rather than their overall UPI volumes, industry executives said.
“The introduction of MDR would bring a clearer commercial dimension to UPI, but the impact will vary across payment companies depending on their mix of merchant transactions. A platform’s overall UPI volume alone will not determine the benefit. The nature and value of the transactions it processes will also matter,” a senior Paytm executive said.
The executive, who did not wish to be named, said companies with established relationships with businesses could be better placed to benefit if merchants are required to pay for selected UPI transactions.
“For the industry, this could lead to greater differentiation between payment businesses based on their merchant franchises and transaction mix. Companies with established relationships with businesses may be better placed to capture the economics of a merchant-funded model,” he said.
MDR is a fee paid by a merchant to banks and payment companies for processing digital payments. UPI transactions currently operate without MDR, with the government providing incentives to support the payments ecosystem.
The government is considering a framework that could allow MDR to be charged on selected UPI merchant transactions. However, no final MDR rate, transaction threshold or revenue-sharing arrangement has been announced.
Piyush Jhunjhunwala, founder and CEO of Stockify, said the proposed changes raise questions about how digital payments can develop a profitable model without affecting access to UPI.
“The question of imposing a UPI fee is fundamentally about how the digital payments ecosystem can build profitable economics without compromising the accessibility that lies at the core of its success,” he said.
While large companies may be able to absorb such additional costs, small retailers and local businesses could feel the impact more directly because of their narrower margins, Jhunjhunwala said. Even a small charge, when multiplied across a large number of transactions, could raise costs and prompt businesses to reconsider payment options or negotiate processing terms.
He said the change could also shift the focus of fintech companies from transaction volumes towards the economics of individual transactions.
“Monetising transactions could give payment service providers greater flexibility to invest in technology, fraud detection and other services, thereby strengthening their business models,” he added.
A proposal under consideration includes an MDR of 0.3-0.5% on transactions above Rs 2,000 at merchants with annual turnover of more than Rs 1.5 crore. Such transactions account for about 4% of UPI transaction volumes but around 67% of transaction value.
Meanwhile, PhonePe co-founder and CEO Sameer Nigam has said consumers would not have to pay for UPI payments. “UPI is and will remain free for all Indian consumers! Consumers will NOT BE CHARGED anything for making UPI payments,” Nigam said on X.
MDR may create Rs 5,000-10,000 crore annual revenue pool
Jefferies estimates that the proposed MDR could create an annual revenue pool of Rs 5,000-10,000 crore for the payments industry, depending on the final fee and transactions covered.
Brokerages have also started estimating the potential impact of UPI MDR on individual payment companies.
PhonePe leads the UPI market by transaction value with a 46.26% share, followed by Google Pay at 32.75% and Paytm at 7.91%. Paytm is the only listed entity among the three.
Jefferies estimates Paytm could generate around Rs 300-730 crore in additional annual revenue if MDR is introduced, depending on the final structure. The brokerage expects Paytm to benefit from its merchant payments business and role as a payments acquirer.
Bernstein has estimated a larger potential earnings impact for Paytm. It projects an EBITDA benefit of about Rs 1,320 crore in FY28, rising to Rs 1,690 crore in FY29 and Rs 2,160 crore in FY30, based on assumptions about Paytm’s share of MDR economics.
These estimates are based on assumptions about the MDR rate, eligible transactions and the portion of the fee retained by payment companies. They are not projections issued by Paytm.
The Paytm executive said the revenue opportunity should first be assessed at the level of the overall UPI ecosystem.
“The revenue opportunity should therefore be assessed at the ecosystem level first. How that pool is ultimately distributed between banks, payment aggregators and other participants will determine the impact on individual companies,” he said.