UPI growth slowdown: MDR return debate shakes payments

UPI continues to scale, but the debate around who pays for running the network is getting sharper. On Reddit and payments forums, the focus is on whether a limited Merchant Discount Rate (MDR) can fund infrastructure without hurting adoption.

Why MDR is back in the conversation

UPI and RuPay debit card payments have been exempt from MDR since January 2020, after the government made them free to boost digital adoption. That zero-MDR policy helped UPI become the dominant rail, now accounting for over eight in 10 digital payment transactions by volume. The concern being discussed now is sustainability, because banks and fintech players still bear processing, settlement, and infrastructure costs. Industry voices cited in public discussions say each transaction costs about Rs 2 to process, which adds up quickly at UPI scale. Stakeholders also link the debate to slowing growth, arguing that the next phase will need higher investment in technology and cybersecurity. Some payment firms have called the current model economically unviable, pointing to the gap between costs and incentives. A parliamentary committee has also recommended a tiered charge model to address what it called a significant funding gap. The policy question has shifted from whether UPI should be free for users to whether some merchants should pay for certain transactions.

What the proposed PSS Act amendments could change

The proposed changes to the Payment and Settlement Systems Act, 2007 are being discussed as a route to allow banks and payment system providers to charge fees on UPI and RuPay debit card payments. The key point in the public chatter is that not all transactions are expected to face MDR. Multiple industry references suggest any MDR, if introduced, could be limited to transactions above Rs 2,000. That threshold matters because it implies an overwhelming majority of UPI payments would continue to be free. The government is described as considering MDR for UPI transactions with large merchants, rather than for small kiranas and micro sellers. The intent, as framed by executives and analysts, is to create a revenue pool while minimising disruption to overall volumes. This would also be a shift from the current approach where monetisation relies heavily on government incentives. Market participants are watching whether the proposal stays limited to large merchants and higher ticket sizes. Even if the law changes, implementation details will decide whether the impact is meaningful or marginal.

How much MDR is being discussed, and on what

Social media discussions cite two MDR ranges, reflecting uncertainty about what might finally be notified. One set of industry discussions, attributed to Mistry of Zeta, suggests MDR of 0.05-0.07% for UPI payments. Another view, attributed to brokerage Bernstein, expects MDR could be 30-40 basis points, but likely only for large merchants and transactions above Rs 2,000. These are not official figures, but they show how wide the market’s expectations are at this stage. The difference between 0.05-0.07% and 30-40 bps is material for revenue outcomes, so investors and operators are modelling multiple scenarios. The threshold-based approach is being framed as a compromise, keeping small value payments free while monetising a subset of merchant payments. Merchants are expected to be the ones charged, because MDR is levied on merchants by the banks that process payments. However, users online are debating whether merchants will pass on the cost through higher prices or surcharges. The overall point is that even a modest fee, applied selectively, could change unit economics for payment players.

The funding gap behind the policy push

A parliamentary committee report cited in discussions highlights the mismatch between operating costs and incentives. In FY24, the ecosystem collectively spent Rs 12,000 crore to process merchant transactions but received only Rs 3,000 crore in return, leaving a large shortfall. The same report notes that government incentive support constitutes only 11% of the cost incurred by the industry and 14% of the potential MDR collected by the industry. Separately, industry estimates cited by Mistry of Zeta suggest the annual cost of operating UPI and RuPay debit card infrastructure could be at least Rs 10,000 crore. Another set of industry comments put the requirement between Rs 10,000 crore and Rs 15,000 crore to sustain and grow UPI. The debate is also tied to the gradual reduction in government incentives that historically supported small-value merchant payments. For FY26, the government has earmarked Rs 2,200 crore as subsidy support, but it is cited as yet to be disbursed in the discussions. Payment companies argue that without predictable cashflows, it becomes harder to fund innovation, security, and compliance. This funding gap is the core reason MDR is being positioned as a sustainability tool, not a growth stunt.

What the growth slowdown signals for the ecosystem

The UPI network is still expanding, but the pace is expected to ease compared with recent years. NPCI data cited in discussions points to around 240 billion transactions in FY26, translating to nearly 30% year-on-year growth. That compares with 41% expansion recorded in FY25, signalling a clear deceleration. Another set of projections expects volume growth to decline to 25% in FY26 from 42% in FY25. The value side appears to be cooling faster in some conversations, with UPI transaction value growth cited at 13% even while volume growth remains around 28%. Industry participants link this slowdown to urban penetration, arguing the next leg of adoption will come from smaller towns and rural India. That shift requires deployment and servicing of acceptance infrastructure, plus more spending on compliance and cybersecurity. Some voices also say payments fintechs are not attracting funding, which weakens the ability to invest ahead of demand. Against this backdrop, MDR is being framed as a way to fund the next phase rather than to monetise existing growth.

Merchant acceptance trends add pressure

One datapoint circulating is that the active merchant QR network has grown at about 5% CAGR over the last three years. That suggests merchant expansion is slowing, even as UPI volumes remain large. Another claim being discussed is that only about 45% of India’s merchants accept UPI payments on a monthly basis. If accurate, this implies significant headroom, but it also means the hardest part of adoption may be ahead. Payments players argue that taking UPI deeper into the hinterland requires more spending on onboarding, devices, servicing, and reliability. At the same time, there is visible sensitivity to any fee that might discourage small merchants from accepting UPI. This is why most MDR proposals being discussed focus on large merchants and higher ticket transactions. The model being debated tries to preserve financial inclusion benefits while creating a revenue stream where capacity to pay is higher. Some executives have argued that without MDR, companies cannot run large incentive programmes to drive adoption in smaller markets. The merchant acceptance data points are now being used on both sides of the argument, either to support monetisation or to caution against it.

Who benefits and who may feel pain

Banks and payment service providers say MDR could help recover investments in technology, cybersecurity, and payments infrastructure. A tiered charge model would also reduce dependence on government subsidies, which have been uncertain and lower than reported industry costs. Fintech firms see MDR as a way to fund product upgrades and operational resilience, especially if external funding remains weak. For merchants, the impact depends on whether MDR applies broadly or only to high-value payments and large chains. Some of the chatter flags a risk that merchants could pass on any MDR through pricing, effectively shifting costs to consumers. Others argue that if MDR is limited to transactions over Rs 2,000, most everyday purchases would remain unaffected. The debate also touches RuPay debit cards, since the proposed changes could allow fees there too, and industry insiders say incentives on RuPay have been removed for large merchants. For users, the headline risk is confusion, because “UPI is free” is a deeply established expectation. For the ecosystem, the bigger risk is underinvestment if the funding gap persists. This is why discussions are now focusing on controlled monetisation rather than a blanket fee.

Key numbers being tracked by the market

The conversation is data-heavy because the direction of policy can change revenue pools and investment plans. Below are the most cited figures and thresholds being shared across reports and social posts. These numbers are not a single official framework, but they show the range of assumptions in play. They also highlight why a targeted MDR could be meaningful even if only a slice of transactions is charged. The table captures growth projections, cost estimates, and the most discussed MDR ranges. Investors tracking listed banks and payment ecosystem exposures are watching how these inputs translate into policy. Fintech founders are watching the same numbers for signals on monetisation and runway. Merchants are watching for clarity on thresholds and whether large-merchant definitions are introduced. Consumers are watching for any sign of pass-through pricing.

What to watch next for UPI, banks, and fintechs

The immediate trigger to monitor is whether amendments to the Payment and Settlement Systems Act move forward, and how the final language defines fee eligibility. The next is whether MDR, if allowed, is limited to large merchants and high-value transactions as currently suggested. A third watchpoint is the final rate, since the discussion ranges from 0.05-0.07% to 30-40 basis points depending on the source. The timing and disbursal of the FY26 subsidy allocation is also crucial, because delays add to cashflow stress for participants. Market participants will also track whether RuPay debit card incentives and fee rules change alongside UPI. Another key signal is how NPCI and policymakers frame UPI, as a public good that is fully subsidised, or as infrastructure that needs a hybrid revenue model. For adoption, the big question is whether merchant acceptance expands beyond the current base without heavy incentives. For listed financials, the debate matters because it can influence payment economics, investment appetite, and competitive intensity. Until policy is clearer, the most realistic outcome being priced into discussions is a narrow, tiered MDR that keeps most UPI payments free while monetising a small slice.