Researchers at IIT-Bombay are calling for a reduction in the upcoming 0.4% Merchant Discount Rate (MDR) on UPI transactions, proposing a 0.08% cap instead. The study argues that banks should fund UPI infrastructure using their existing interest income from deposits, rather than charging merchants. The NPCI's new fee structure is currently scheduled to take effect on October 15, 2026.
The debate regarding the sustainability and cost structure of India's digital payment ecosystem has sharpened as a new report from IIT-Bombay researchers challenges the National Payments Corporation of India's (NPCI) upcoming policy. Scheduled for implementation on October 15, 2026, the NPCI circular mandates a 0.4% Merchant Discount Rate (MDR) on person-to-merchant (P2M) UPI transactions that exceed Rs 2,000. Researchers have now proposed that this fee be capped at a significantly lower 0.08%.
The core of the argument presented by the researchers, Professor Ashish Das and former RBI official Pragya Das, is that the burden of funding the digital payments network should not fall on merchants. Instead, they suggest that banks, which generated over Rs 4.85 lakh crore in net interest margins from Current Account and Savings Account (CASA) deposits in the 2026 fiscal year, have sufficient resources to absorb the costs of maintaining UPI infrastructure. The study recommends that banks allocate a portion of these earnings to support the system, viewing UPI as essential public infrastructure akin to other fundamental banking services.
Regarding the proposed alternative fee structure, the report suggests a 0.08% cap, with 0.06% intended for third-party application providers and 0.02% for payment service providers. This proposal specifically calls for restricting these fees to merchants with annual turnovers exceeding Rs 50 crore. By keeping the system free for smaller transactions and smaller businesses, the researchers aim to maintain public trust and adoption levels.
For investors and market participants, the potential implementation of the 0.4% MDR remains a key development to watch. While the fee aims to improve revenue for payment providers, there is a risk that merchants may pass these costs on to consumers, which could influence retail pricing and overall digital transaction volume. Conversely, if the regulatory framework is adjusted to accommodate a lower fee structure, it may impact the projected fee income for banks and payment service providers.
Financial markets are currently tracking the situation as it directly involves the revenue models of both traditional banks and fintech companies. The outcome of this debate, particularly regarding how the NPCI balances the needs of different stakeholders before the October 15 deadline, will be the next major monitorable. Investors will also look for any potential guidance from the Reserve Bank of India or further official clarification on whether the current MDR structure will be revised or maintained as planned.