Researchers at IIT-Bombay have recommended capping UPI merchant fees at 0.08%, challenging the planned 0.4% charge on transactions over ₹2,000 scheduled for October 15. The proposal argues that banks should fund the system through existing interest margins rather than imposing new costs on merchants, who are already seeking a deferment due to the festive season.
Researchers at the Indian Institute of Technology (IIT) Bombay have introduced a new challenge to the upcoming changes in the digital payment ecosystem. Professors Ashish Das and Pragya Das have published a study urging authorities to limit the Merchant Discount Rate (MDR)—the fee charged to merchants for processing digital payments—to 0.08 percent. This is significantly lower than the 0.4 percent rate that the National Payments Corporation of India (NPCI) has planned to implement starting October 15, 2026, for transactions exceeding ₹2,000.
Impact on Revenue and Costs
The central argument of the report is that banks, which act as the backbone of the UPI infrastructure, do not necessarily need to rely on merchant fees to sustain the platform. The study highlights that Indian banks generated over ₹4.85 lakh crore in net interest margins from Current Account and Savings Account (CASA) deposits during the last fiscal year. The researchers suggest that allocating a small portion of these existing margins would be sufficient to cover the costs of upgrading and maintaining the UPI network. For banks and payment aggregators, this proposal represents a conflict of interest. The planned 0.4 percent fee was expected to create a new revenue stream for the banking and fintech industry. If regulators were to adopt the lower 0.08 percent recommendation, it could materially alter the revenue outlook for companies heavily invested in the digital payments space.
Merchant Concerns and Implementation Risks
The timing of the proposed 0.4 percent fee has drawn criticism from various merchant associations, particularly because it is set to roll out just ahead of the peak festive season. Many small businesses are concerned that passing on these costs could hurt their profit margins or force them to discourage digital transactions in favor of cash. Some merchant bodies have already formally requested the NPCI to defer the rollout of the new fee structure, fearing that it could disrupt consumer behavior at a time when retail activity is usually at its highest.
What Investors Should Monitor
The path forward depends largely on whether the NPCI or the regulator makes any adjustments to the planned 0.4 percent rate or delays the implementation date. Investors in the banking and fintech sectors should watch for two specific triggers. First, any official notification regarding a deferment or modification of the fee structure would be a major update, as it would directly impact the short-term revenue expectations for payment processors. Second, any commentary from the government on balancing merchant convenience with the profitability of the digital payments infrastructure will be critical. The industry remains in a state of uncertainty as the October 15 deadline approaches, with the debate between protecting merchant margins and ensuring the long-term sustainability of digital infrastructure continuing to intensify.