Reserve Bank of India (RBI) Governor Sanjay Malhotra has reignited the debate over the future of India’s Unified Payments Interface (UPI) by stating that “someone has to pay” for the country’s rapidly expanding digital payments infrastructure. His remarks came in response to questions on whether the government should reintroduce the Merchant Discount Rate (MDR) on UPI transactions, highlighting the challenge of ensuring the long-term financial sustainability of India’s digital payments ecosystem.
While the RBI has not proposed imposing MDR on UPI transactions, the Governor acknowledged that operating and maintaining a payments network of UPI’s scale involves significant costs. He emphasized that payment service providers, banks, and infrastructure operators incur expenses in processing billions of transactions, and a sustainable funding model will eventually be needed. The comments have revived industry discussions on how to finance India’s digital payments infrastructure without slowing UPI adoption.
RBI Governor: ‘Someone Has to Pay’
Addressing concerns over the cost of running UPI, Malhotra said payment infrastructure cannot operate without funding.
He noted that:
- Payment systems involve operational and technology costs.
- Banks and payment service providers incur expenses for processing transactions.
- The issue is not whether there is a cost, but who should bear it.
- A sustainable revenue model is necessary for long-term growth.
However, he clarified that no decision has been taken to impose MDR on UPI payments, and any such move would be a policy decision involving the government and other stakeholders.
Key Takeaways
| Topic | RBI Governor’s Remarks |
|---|---|
| UPI Costs | Digital payments infrastructure has operational costs |
| MDR Proposal | No decision taken |
| Main Observation | “Someone has to pay” for the ecosystem |
| Focus | Long-term sustainability of digital payments |
What Is Merchant Discount Rate (MDR)?
Merchant Discount Rate (MDR) is the fee that merchants pay to banks and payment service providers for accepting digital payments.
Typically, MDR is shared among:
- The acquiring bank.
- The issuing bank.
- Payment network operators.
- Payment service providers.
For UPI transactions, the government removed MDR in 2020 to encourage digital payments, making person-to-merchant UPI transactions free for merchants.
Why the Debate Has Returned
India’s UPI ecosystem has grown into one of the world’s largest real-time payment systems.
Today, it processes:
- Billions of transactions every month.
- Payments worth trillions of rupees.
- Transactions across consumers, merchants, businesses, and government services.
As transaction volumes continue to rise, banks and payment companies argue that maintaining servers, cybersecurity, fraud prevention systems, and payment infrastructure requires significant investment.
Industry participants have repeatedly requested either:
- The return of MDR, or
- Higher government subsidies to offset operational costs.
Industry’s Perspective
Banks and fintech companies have long argued that the zero-MDR policy limits their ability to recover infrastructure costs.
According to industry participants, challenges include:
- Rising technology investments.
- Fraud prevention expenses.
- Customer support costs.
- Infrastructure upgrades.
- Limited revenue from UPI transactions.
Some payment companies believe a small MDR or alternative compensation mechanism could make the ecosystem more sustainable.
Government’s Position So Far
The Government of India has consistently supported keeping UPI free for users and merchants to encourage digital payment adoption.
Instead of allowing MDR, the government has provided:
- Incentive schemes for banks.
- Financial support for payment service providers.
- Budgetary allocations to promote digital payments.
Officials have repeatedly indicated that free digital payments have played a major role in expanding financial inclusion and accelerating India’s cashless economy.
What It Could Mean for Merchants and Consumers
If MDR were ever reintroduced in the future, the impact could include:
| Stakeholder | Possible Impact |
|---|---|
| Merchants | May pay a fee on UPI transactions |
| Consumers | UPI is likely to remain free for person-to-person payments, though policies could evolve |
| Banks | Additional revenue to support payment infrastructure |
| Fintech Companies | Improved sustainability of digital payment operations |
At present, UPI transactions remain free for merchants under the existing policy, and there has been no announcement of any change.
Looking Ahead
The RBI Governor’s remarks highlight an increasingly important question facing India’s digital payments ecosystem: how to sustainably finance one of the world’s largest real-time payment networks. While Sanjay Malhotra acknowledged that maintaining UPI infrastructure comes with significant costs and observed that “someone has to pay,” he stopped short of endorsing the reintroduction of Merchant Discount Rate (MDR). Instead, his comments signal the need for a broader discussion on balancing financial sustainability with the continued growth of digital payments.
Looking ahead, any decision on MDR will require careful coordination between the RBI, the central government, banks, fintech firms, and merchant associations. Given UPI’s pivotal role in India’s digital economy, policymakers are likely to weigh the benefits of preserving free transactions against the long-term need to fund infrastructure, innovation, and cybersecurity without slowing the platform’s remarkable adoption.
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