Ahead of the implementation of the new Merchant Discount Rate (MDR) framework on high-value Unified Payments Interface (UPI) transactions on October 15, 2026, leading payment aggregators (PAs) have initiated negotiations with their partner sponsor banks to secure a larger cut of the fee pool.The Financial ExpresAccording to an investigation by The Financial Express, payment firms—including major aggregators such as Razorpay, Cashfree, PayU, and Pine Labs—are seeking a more favorable revenue-sharing arrangement on the 0.12% cut allocated to the acquiring bank. The negotiations highlight a structural tension in India’s digital payments architecture: while sponsor banks hold the settlement accounts and direct connectivity with the National Payments Corporation of India (NPCI), non-bank payment aggregators build, run, and maintain the merchant checkout pipelines, fraud detection algorithms, and API routing infrastructure.
Key Takeaways
- Negotiations Over the 0.12% Acquiring Share: Payment aggregators are negotiating with acquiring sponsor banks (such as HDFC Bank, ICICI Bank, Axis Bank, and SBI) to secure a majority cut of the 0.12% fee allocated to the acquiring leg under the incoming UPI MDR model. www.financialexpress.com
- October 15 Implementation Deadline: The talks come ahead of the scheduled October 15, 2026 introduction of MDR on transactions above ₹2,000, which reopens commercial fee monetization across select merchant categories. India Business Trade
- The “Direct Acquirer” Ambition: As a long-term solution, several large payment aggregators are preparing to approach NPCI to seek direct membership as acquirers, which would eliminate the sponsor-bank layer and allow PAs to retain the entire 0.12% fee. India Business Trade
- Precedent in Card Networks: The push for direct acquiring access follows the precedent set in July 2026 by Glomo, a GIFT City-based fintech that became India’s first non-bank to receive direct principal acquiring membership from Visa. www.financialexpress.com
- Merchant Mix Dictates Margins: PAs with high exposure to e-commerce, consumer electronics, and travel bookings stand to capture higher fee revenue from tickets over ₹2,000, while flat-fee categories (like utilities and telecom at ₹5/transaction) offer stable baseline volumes. India Business Trade
- Tier-1 Dominance: Market leaders with vast merchant networks hold significant leverage in bilateral bank talks, whereas smaller aggregators face compressed margins under standard sponsor-bank terms.
1. Central Dispute: The Split of the Acquiring Leg
Direct Answer: Under the new UPI framework, transactions on high-value retail payments will carry an MDR (with caps and category variations), structured across issuing banks, the NPCI switch, and acquiring entities. The acquiring leg is set at approximately 0.12%. However, in India, non-bank payment aggregators cannot clear funds directly with the central bank or connect directly to NPCI switches as settlement participants; they must route transactions through an acquiring sponsor bank.
The Financial Express+ 2
Because PAs invest heavily in developer APIs, merchant onboarding, instant checkout SDKs, and chargeback management, they argue that the standard bank-tilted fee split does not reflect the operational burden.
THE UPI MERCHANT ACQUIRING SPLIT CONFLICT
│
┌────────────────────────────────────┴────────────────────────────────────┐
▼ ▼
WHAT THE SPONSOR BANK PROVIDES WHAT THE PAYMENT AGGREGATOR PROVIDES
• Direct connectivity & settlement rails to NPCI • Front-end merchant onboarding & KYC compliance
• Escrow / nodal bank accounts for fund clearance • Checkout software SDKs, APIs, and dynamic QR tech
• Regulatory banking balance-sheet cover • Real-time fraud detection & transaction success routing
• Minimal direct contact with individual online merchants • 24/7 technical dispute & chargeback reconciliation
│ │
└────────────────────────────────────┬────────────────────────────────────┘
▼
THE BILATERAL SPLIT NEGOTIATION
Aggregators are pushing to keep the lion's share of
the 0.12% acquiring fee, reducing the bank's passive margin.
2. PAs Eye Direct Acquirer Status with NPCI
The ongoing negotiations have accelerated discussions about structural changes to India’s domestic payment plumbing:
+-----------------------------------------------------------------------------------+
| STRUCTURAL EVOLUTION: SPONSORED VS. DIRECT ACQUIRING |
+-----------------------------------------------------------------------------------+
| Parameter | Current Sponsored Model | Proposed Direct Model |
+--------------------------------+--------------------------+---------------------------------------+
| **NPCI Connectivity** | Via Sponsor Bank | **Direct PA Interface to NPCI Switch**|
| **Settlement Intermediary** | Commercial Bank Escrow | Direct RBI Settlement Account |
| **Acquiring Share Retention** | Split between PA & Bank | **100% Retained by PA (~0.12%)** |
| **Regulatory Approval** | Standard RBI PA License | Requires Special NPCI/RBI Approval |
| **Global Precedents** | Stripe/Adyen via banks | Adyen/Worldpay as direct acquirers |
+--------------------------------+--------------------------+---------------------------------------+
CURRENT VS. DIRECT ACQUIRING ARCHITECTURE
│
[ CURRENT ] Merchant ──► Payment Aggregator ──► Sponsor Bank ──► NPCI Switch
(0.12% Split between PA & Bank)
│
[ PROPOSED ] Merchant ──► Direct Payment Acquirer (PA) ──────────► NPCI Switch
(100% of 0.12% Retained by PA)
The Card Network Precedent (Glomo & Visa)
Payment firms cite precedent in the card payments space. In July 2026, Glomo, a payment service provider operating out of GIFT City, secured principal membership with Visa. This enabled Glomo to process transactions directly with the card network without an intermediary acquiring bank.
www.financialexpress.com+ 2
Aggregators argue that granting non-bank PAs direct acquiring membership on UPI would allow them to deploy technical updates faster, reduce processing latency, and retain the full acquiring margin.
India Business Trade
3. Merchant Economics & Category Variations
The revenue potential for payment aggregators varies significantly depending on their underlying merchant mix:
India Business Trade
+-----------------------------------------------------------------------------------+
| UPI MDR CATEGORY DYNAMICS POST-OCTOBER 15 |
+-----------------------------------------------------------------------------------+
| Merchant Vertical | MDR Structure Applied | Impact on Aggregator Margins |
+--------------------------------+--------------------------+---------------------------------------+
| **High-Ticket E-Commerce** | Standard Percentage MDR | High profitability; transactions over |
| (Electronics, Luxury, Travel) | on tickets > ₹2,000 | ₹2,000 generate significant fee pool |
+--------------------------------+--------------------------+---------------------------------------+
| **Utilities & Telecom** | Flat Fee (~₹5 / ticket) | Predictable, steady volume revenue |
| (Insurance, Fuel, Broadband) | | with lower margin volatility |
+--------------------------------+--------------------------+---------------------------------------+
| **Small Offline Merchants** | **Zero MDR Maintained** | Fully insulated; zero fee generation; |
| (Kiranas, street vendors) | Subsidized by government | PAs rely on soundbox subscriptions |
+--------------------------------+--------------------------+---------------------------------------+
- Large-Ticket Advantage: PAs serving premium e-commerce, consumer durables, airline ticketing, and high-value services will see immediate top-line expansion, as a large percentage of orders exceed the ₹2,000 threshold.
- The Small Merchant Insulation: Small retail vendors and local kiranas remain completely exempt from MDR, with the government and NPCI ensuring zero transaction costs for small-scale merchants. For these merchants, fintechs will continue to rely on hardware device rental fees (such as soundboxes and POS displays) rather than per-transaction MDR.
Frequently Asked Questions (FAQs)
What is the new UPI MDR rule taking effect on October 15?
Beginning October 15, 2026, a revised Merchant Discount Rate (MDR) structure takes effect on specific high-value UPI transactions (primarily tickets exceeding ₹2,000) at commercial retail and online platforms, while exempting small offline merchants.
India Business Trade
Why are payment aggregators negotiating with sponsor banks?
Under the incoming framework, acquiring banks receive an estimated 0.12% fee on eligible transactions. Payment aggregators—who handle the technical infrastructure, developer APIs, and merchant relationships—are negotiating to secure a higher percentage of that 0.12% cut from their partner sponsor banks.
www.financialexpress.com
What does “direct membership with NPCI” mean for payment firms?
Direct membership would allow non-bank payment aggregators to connect directly to the NPCI switch as acquirers rather than routing through a commercial sponsor bank. This would let PAs retain the entire acquiring share of the MDR, though it requires regulatory clearance from the Reserve Bank of India and NPCI.
Will consumers have to pay extra when paying via UPI?
No. For ordinary consumers, UPI payments remain completely free. The MDR is a merchant-side acquiring fee paid by commercial businesses to processing banks and payment aggregators, similar to card acceptance fees.
Facebook+ 1
Get the day’s top stories in your inbox
One concise email. No spam, unsubscribe anytime.
