Payment aggregators (PAs) are pushing for a fixed and direct share of any future Merchant Discount Rate (MDR) that may be imposed on select Unified Payments Interface (UPI) transactions, seeking to avoid dependence on partner banks to pass through their portion of the fee. The demand comes after Parliament passed the Taxation and Other Laws (Amendment) Bill, 2026, creating the legal framework for introducing MDR on certain UPI merchant transactions in the future. The government has clarified that consumers will continue to make UPI payments without transaction charges.
Payment aggregators argue that they bear substantial costs for merchant onboarding, servicing, compliance, payment processing and infrastructure, and therefore should be recognized as fee-earning participants in their own right. However, the demand could face resistance because PAs are not direct members of the UPI network operated by the National Payments Corporation of India (NPCI). The RBI and Department of Financial Services are currently deliberating the potential MDR structure and how revenue could eventually be distributed among participants.
Payment Aggregators Seek Direct Share Of UPI MDR
Payment aggregators are third-party payment service providers that help businesses accept digital payments. They typically onboard merchants, provide payment technology, manage transactions and reconciliation, and work with acquiring or sponsor banks to connect merchants to UPI.
With the government opening the door to a future UPI MDR regime, PAs want their contribution to the ecosystem to be formally recognized in the fee structure.
Their preference is for a specific, fixed share of MDR to be paid directly to payment aggregators, rather than having banks receive the fee and subsequently negotiate or remit a portion to their PA partners.
UPI MDR Demand At A Glance
| Particular | Current / Proposed Position |
|---|---|
| Payment aggregators’ demand | Fixed, direct MDR share |
| Current UPI MDR | Zero |
| Potential future MDR | Limited merchant transactions |
| Consumer charge | No |
| P2P transactions | Continue to remain free |
| Large merchant transactions | Potentially subject to MDR |
| PA role | Merchant onboarding, servicing, technology and processing |
| UPI network operator | NPCI |
| PA network status | Not direct UPI members |
| Key policy bodies | RBI, DFS and NPCI |
| MDR framework | Not yet finalized |
The central issue is therefore not whether consumers will pay for UPI. The government has already said they will not. The debate is about who pays on the merchant side and how the resulting revenue is divided among ecosystem participants.
Why Payment Aggregators Want A Separate MDR Share
PAs say they have spent years building the infrastructure required to bring merchants onto UPI.
Their responsibilities can include merchant acquisition, technical integration, payment processing, reconciliation, fraud controls, customer support and compliance.
Under the existing zero-MDR environment, these activities cannot be funded through a transaction-level UPI fee.
Instead, payment aggregators have developed other revenue streams, including platform fees, onboarding charges and additional services offered to merchants.
The proposed MDR would create a new potential revenue stream.
Merchant Onboarding
↓
Technology Integration
↓
Payment Processing
↓
Reconciliation & Servicing
↓
Fraud / Risk Management
↓
Future UPI MDR
↓
PA Revenue Share
The PAs’ argument is that the revenue allocation should reflect the costs and functions performed by each participant.
The Direct-Payment Demand Could Face Resistance
The biggest obstacle is the position of payment aggregators within the UPI architecture.
PAs are not direct members of the NPCI-operated UPI network. They typically operate through relationships with sponsor or acquiring banks.
That means any direct MDR allocation to PAs could require policymakers to formally recognize them as fee-earning participants even though the network membership structure currently places banks at the core of the payment system.
UPI Ecosystem Structure
| Participant | Primary Role |
|---|---|
| Issuing bank | Holds customer’s account |
| PSP bank | Connects UPI apps to the network |
| UPI app / TPAP | Consumer-facing payment interface |
| Acquiring bank | Supports merchant-side acceptance |
| Payment aggregator | Onboards and services merchants |
| NPCI | Operates UPI network |
| Merchant | Accepts payment |
| Consumer | Makes payment |
The question is whether PAs should be treated as a separate fee-earning category alongside banks and UPI application providers.
One source cited by Business Standard said any direct membership for payment aggregators would require a high-level decision by the RBI.
UPI MDR Framework Has Not Been Finalized
The recent legislative change does not itself establish a UPI MDR rate.
The Taxation and Other Laws (Amendment) Bill, 2026 amended the legal framework to enable charges on specified electronic payment modes, but the actual MDR rate, eligible transactions and revenue-sharing mechanism still need to be determined separately.
The government has said that any future MDR would apply only to a limited category of merchant transactions above a specified threshold.
It has also said the rate would be nominal and lower than MDRs typically charged on debit and credit card transactions.
What Is Known About Future UPI MDR?
| Issue | Current Position |
|---|---|
| MDR rate | Not finalized |
| Transaction threshold | Not finalized |
| Merchant eligibility | Not finalized |
| Consumer fee | No |
| P2P fee | No |
| Broad merchant coverage | No |
| Revenue sharing | Not finalized |
| Final decision mechanism | UPI and Services Steering Committee |
The absence of a finalized framework explains why banks, payment aggregators and other industry participants are already lobbying for their preferred allocation model.
Government Wants UPI To Remain Free For Consumers
The government has repeatedly clarified that the possible MDR regime is not intended to make UPI payments more expensive for consumers.
The Ministry of Finance said consumers will not face transaction charges and that person-to-person payments will remain free. It also said the vast majority of merchant transactions will continue to remain free.
The potential charge would therefore target only a limited set of merchant transactions above a specified threshold.
Proposed UPI Charging Model
Consumer
₹0 UPI Fee
↓
P2P Transactions
₹0 MDR
↓
Most Merchant Transactions
₹0 MDR
↓
Selected High-Value Merchant Transactions
Potential Nominal MDR
This structure is intended to preserve UPI’s mass-market affordability while creating some revenue to support the ecosystem.
UPI Has Reached Massive Scale
The economic significance of the MDR debate is tied directly to UPI’s enormous transaction volume.
UPI processed 23.66 billion transactions worth ₹29.9 lakh crore in July 2026, according to government data. The platform has also expanded internationally and is now live in 11 foreign countries.
UPI Scale In July 2026
| Metric | July 2026 |
|---|---|
| UPI transactions | 23.66 billion |
| Transaction value | ₹29.9 lakh crore |
| Average transaction value | ~₹1,263 |
| Countries where UPI is live | 11 |
The enormous scale means even a very small MDR rate could generate significant revenue if applied to a sufficiently large pool of eligible merchant transactions.
However, the government intends to restrict the charge to a limited category, meaning the eventual revenue will depend heavily on the threshold and transaction definition.
Earlier Industry Proposals Suggested 0.3% MDR
The broader digital-payments industry has previously advocated a nominal MDR on UPI transactions involving large merchants.
The Payments Council of India had proposed an MDR of around 0.3% for large merchants, arguing that the rate would remain below typical card-payment costs.
The proposal would focus the charge on businesses with the ability to absorb payment-processing costs rather than smaller merchants.
Illustrative MDR Comparison
| Payment Method | Indicative MDR / Cost Structure |
|---|---|
| Proposed UPI MDR | ~0.3% industry proposal |
| Debit cards | Up to ~0.9% |
| Credit cards | Often ~2%-3% |
| UPI currently | 0% |
The 0.3% figure is an industry proposal, not an announced government rate. The final UPI MDR could be different.
Potential MDR Revenue Could Be Significant
Earlier estimates suggested that a UPI MDR of 25-30 basis points could generate between ₹13,500 crore and ₹16,000 crore annually across the ecosystem, depending on the transactions covered.
However, those estimates should be treated as indicative because the government has not finalized the applicable threshold or MDR rate.
Illustrative Revenue Scenarios
| MDR | Estimated Annual Ecosystem Revenue* |
|---|---|
| 0.25% | ~₹13,500 crore |
| 0.30% | ~₹16,000 crore |
*Earlier industry/banker estimates cited by Moneycontrol; actual revenue would depend on the final rate, eligible transactions and payment value.
This explains why the allocation dispute has become important.
Even a relatively small fee pool could translate into substantial revenue for banks, payment providers and other participants if the eligible transaction base is large enough.
How The MDR Could Be Distributed
A future MDR framework could potentially divide the revenue among several participants.
These may include the customer’s issuing bank, merchant’s acquiring bank, PSP banks, UPI application providers, payment aggregators and NPCI.
The exact distribution has not been finalized.
Potential MDR Revenue Chain
Merchant Pays MDR
↓
MDR Pool
↓
Issuing Bank
Acquiring Bank
PSP / UPI App
Payment Aggregator
NPCI
The challenge is determining how much each participant should receive based on its contribution and costs.
A higher allocation to one participant necessarily reduces the amount available to others unless the overall MDR rate is increased.
Banks Could Be Major Beneficiaries
Banks are likely to remain central to any UPI MDR model because they are direct participants in the network.
Earlier estimates suggested large account-issuing banks could generate significant revenue from UPI MDR. State Bank of India was estimated to potentially earn up to ₹3,000 crore annually, while Bank of Baroda and HDFC Bank could each potentially earn around ₹800 crore under certain assumptions.
These estimates are not official forecasts and would depend on the final revenue-sharing formula.
Potential Bank Impact
| Bank | Earlier Estimated Annual Benefit |
|---|---|
| State Bank of India | Up to ₹3,000 crore |
| Bank of Baroda | ~₹800 crore |
| HDFC Bank | ~₹800 crore |
| Other major banks | Depends on final allocation |
The numbers illustrate why banks and PAs may have competing interests when the revenue-sharing mechanism is finalized.
Payment Aggregators Already Have A History Of Delayed Subsidy Payments
PAs’ demand for direct MDR payments is partly based on their experience with the government’s digital-payment incentive scheme.
Under the subsidy arrangement for UPI and RuPay debit-card transactions, aggregators had to rely on partner acquiring banks to pass through their share.
PAs argue that this creates uncertainty over the timing and amount of payments they receive.
Their preferred model would therefore remove the intermediary step.
Existing Vs Requested Model
| Existing Structure | PA’s Preferred Structure |
|---|---|
| MDR / subsidy generated | MDR generated |
| Bank receives share | Ecosystem MDR pool |
| PA depends on partner bank | PA receives defined share directly |
| Bilateral negotiation | Predefined allocation |
| Potential payment delays | More predictable revenue |
For PAs, predictability may be almost as important as the size of the eventual share.
Not All Payment Aggregators Are Convinced MDR Will Matter
Interestingly, the industry is not unanimous on the commercial importance of MDR.
Some new-age PA founders believe that even if MDR is introduced, it may not materially change their business economics in the short term.
They argue that competition among payment providers is intense and that PAs are unlikely to pass the additional cost directly to merchants.
Many aggregators have spent the zero-MDR period building alternative revenue streams through platform fees, onboarding services and other products.
This creates a potential situation where a PA receives an MDR share but uses some or all of it to offer competitive pricing to merchants.
MDR Revenue
↓
PA Receives Share
↓
Competitive Merchant Market
↓
Discount / Pricing Adjustment
↓
Merchant May See Little Or No Additional Cost
The final economic impact will therefore depend on how much of the MDR is retained by payment providers versus passed through through lower prices or additional services.
Small Merchants Are Likely To Remain Protected
The government has indicated that the future MDR will apply only to transactions above a specified threshold and that the vast majority of merchant transactions will remain free.
This is important because India has a very large base of small merchants that rely heavily on UPI.
Earlier industry data cited by Business Standard indicated that around 60 million merchants accepted electronic payments, with roughly 90% classified as small merchants with annual turnover below ₹20 lakh.
Merchant Base
| Category | Approximate Number |
|---|---|
| Merchants accepting e-payments | ~60 million |
| Small merchants | ~90% |
| Small merchants by count | ~54 million |
| Larger merchants | ~6 million |
The eventual threshold will determine which businesses actually face MDR.
UPI’s Economics Are Becoming A Policy Priority
The shift toward possible MDR reflects a broader debate over how India’s digital-payment infrastructure should be financed.
UPI has grown at extraordinary speed, but banks, fintech companies and technology providers continue to incur costs for cybersecurity, fraud prevention, infrastructure and innovation.
An opinion published by Moneycontrol cited industry estimates of roughly ₹20,700 crore in annual UPI operating costs against a ₹2,000 crore government allocation under the zero-MDR regime.
The policy question is therefore moving from “How do we make UPI popular?” to “How do we make UPI economically sustainable?”
UPI’s Policy Evolution
| Phase | Primary Objective |
|---|---|
| 2016-19 | Drive adoption |
| 2020 onward | Zero MDR and mass usage |
| 2024-25 | Scale and infrastructure |
| 2026 | Explore sustainable monetization |
| Next phase | Balance cost, competition and access |
The government now has to preserve the affordability that helped UPI become dominant while creating enough economic incentive for ecosystem participants to continue investing.
The Bigger Picture
Payment aggregators’ demand for a fixed and direct share of UPI MDR highlights the next major challenge for India’s digital-payments ecosystem: deciding who should pay for the infrastructure and who should be compensated for maintaining it. PAs argue that their merchant-facing responsibilities justify a defined fee share, while banks and other stakeholders have stronger claims under the existing UPI network structure.
The government has so far kept the consumer side protected. UPI users will not be charged, P2P transactions will remain free, and most merchant transactions are expected to remain free. The unresolved issue is the economics of the limited high-value merchant transactions that could eventually attract MDR. How that revenue is divided among banks, UPI apps, NPCI and payment aggregators could shape competition across India’s digital-payments market.
Looking Ahead
The RBI, Department of Financial Services and NPCI will now have to settle several important questions, including the MDR rate, transaction threshold, eligible merchant categories and revenue-sharing formula. For payment aggregators, securing a direct allocation would represent a significant change in their position within the UPI ecosystem and could reduce their dependence on acquiring banks.
The final framework will need to balance competing objectives: keeping UPI inexpensive for consumers and small merchants, creating sustainable revenue for payment infrastructure, rewarding banks and payment aggregators for their respective roles, and maintaining competition among fintech companies. With UPI processing 23.66 billion transactions worth ₹29.9 lakh crore in July alone, even a narrow MDR framework could create a sizeable economic pool—making the allocation decision one of the most consequential changes to UPI’s business model since the platform’s launch.
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