UPI at 10: Why the MDR debate has returned

As India’s digital payments ecosystem marks a decade of UPI, an old debate is making a comeback.

The fintech industry is once again discussing the possibility of reintroducing a Merchant Discount Rate (MDR) for certain categories of UPI transactions. For years, the issue was largely settled. The success of UPI was built on the principle of keeping digital payments free for consumers and merchants, helping create one of the world’s most successful examples of digital public infrastructure.

Today, however, the conversation is returning, not because anyone disputes the success of UPI, but because questions are being raised about how that success should be sustained over the next decade.

Few would argue with the fact that the zero-MDR framework played a critical role in driving adoption. By removing cost barriers, India accelerated merchant acceptance, encouraged consumer adoption and created powerful network effects that transformed digital payments from a niche behaviour into a daily habit.

The policy achieved precisely what it set out to do.

But every successful infrastructure platform eventually faces a different challenge: how to sustain growth once scale has been achieved.

This is where the current debate begins.

For the last few years, the absence of MDR has been partially offset through government-backed incentive schemes designed to support participants investing in the digital payments ecosystem. However, concerns have increasingly emerged around the predictability and adequacy of these incentives.

In a recent submission to Parliament, the Department of Financial Services noted that incentives provided between FY22 and FY25 constituted only about 11% of the costs incurred by the digital payments industry and approximately 14% of the potential revenue that could have been generated through MDR. The same submission also observed that transactions above ₹2,000 account for a significant majority of transaction value and that the associated costs are largely borne by ecosystem participants.

These observations have reignited questions about whether the current model can support the next phase of UPI’s evolution.

The challenge is not one of demand. UPI continues to process billions of transactions every month and remains deeply embedded in India’s economy. The challenge is one of economics.

Digital payments may feel invisible to users, but they rely on extensive investments in technology infrastructure, cybersecurity systems, fraud prevention tools, merchant onboarding, customer support and compliance frameworks. These investments increase as transaction volumes grow and as payment systems become more sophisticated.

As Reserve Bank Governor Sanjay Malhotra recently observed, “Costs will have to be paid. Someone will have to bear the cost. It is an important infrastructure.” He added that for any service to remain sustainable, its costs must ultimately be covered, whether collectively or by individual users.

The statement reflects a broader reality confronting payment systems around the world. Digital infrastructure may create public value, but it still requires a sustainable funding model.

This is one reason why the MDR debate is no longer confined to industry participants.

Policy analysts have also begun raising similar concerns. Writing recently on the future of UPI, Pranay Kotasthane of the Takshashila Institution argued that the first decade of UPI was about achieving scale, while the second decade must focus on sustainability, security and competition. He noted that maintaining and expanding digital payments infrastructure requires significant ongoing investment and suggested that a calibrated approach to MDR for larger merchants deserves consideration, while keeping smaller merchants protected.

Importantly, the debate is no longer about whether UPI has succeeded. On that question, there is broad consensus.

Nor is the discussion necessarily about imposing costs on small merchants or consumers. Most proposals being discussed publicly focus on targeted approaches that preserve the benefits of digital payments for small businesses while creating greater financial sustainability for the ecosystem as a whole.

The larger issue is whether India’s digital payments infrastructure should continue to rely primarily on government support, whether a market-based mechanism should play a greater role, or whether a hybrid model can balance both objectives.

There are valid arguments on all sides.

Supporters of the current framework point out that free payments have been instrumental in driving inclusion and merchant acceptance. Any policy change must be carefully evaluated to ensure these gains are not reversed.

Those advocating reform argue that infrastructure of this scale requires predictable funding and that uncertainty around revenue models may constrain future investments in innovation, security and expansion.

What is clear is that the conversation has moved beyond adoption.

A decade ago, India’s challenge was convincing people to use digital payments. Today, digital payments are woven into everyday life. The challenge now is ensuring that the ecosystem supporting them remains resilient, innovative and financially sustainable.

As UPI enters its second decade, the most important policy question may not be how much it has grown, but how it will continue to grow.

The answer will likely determine whether the next ten years of UPI are as transformative as the first.

The article was written by the HT Syndication Team.