UPI transformed digital payments by making them virtually free. From October 15, this equation will change as high-value transactions will begin attracting MDR. While the new regime opens a new revenue pool for fintechs, it could reshape user behaviour. So, who will now bear the cost?
UPI Ends Free Ride: The new framework imposes a 0.4% MDR on P2M UPI payments above ₹2,000, capped at ₹300 for transactions of ₹75,000 and more. Merchants receiving up to ₹1 Lakh a month via QR codes remain exempt, but sellers crossing the threshold repeatedly will enter the MDR category. This could expose small businesses to payment acceptance costs, particularly during the festive season when higher-value transactions are the norm.
The Merchant-Side Test: For many sellers, the financial effect will depend on ticket size and transaction mix. A business selling low-value goods may see little immediate impact, while retailers and D2C brands could face a meaningful recurring cost. More importantly, merchants will now have to weigh MDR alongside gateway fees, logistics and marketplace commissions when calculating margins.
The Convenience Question: While the government has prohibited merchants from passing on the costs to consumers, the order does not guarantee that the cost will disappear. Businesses, under margin pressure, may absorb MDR through broad price increases rather than displaying a separate payment fee at checkout. On top of this, many fear that higher-value buyers could move back to cash if UPI loses its frictionless appeal.
Sustainability Vs Scale: Nevertheless, fintech startups see MDR as essential for funding technology upgrades and wider payment infrastructure without relying on subsidies. The revenue could also make UPI more viable for smaller payment players competing against dominant apps. But the success of the policy will rest on maintaining a delicate balance between protecting small merchants and ensuring costs are not pushed onto consumers.
So, can UPI finally become financially viable without losing the low-cost advantage that made it indispensable? Let’s find out…
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Source: Inc42
