By:- Prof Meera Aranha and Prof Srinivasa Reddy, TAPMI
As India debated charging merchants for UPI transactions, the United States was investigating Brazil’s Pix for a remarkably similar reason.The Economist reported that the Trump administration’s trade office spent a year investigating Brazil’s Pix, the free instant-payment system that has largely displaced card-based payments. The U.S. Trade Representative examined whether government support for a zero-fee payment network disadvantaged foreign payment providers such as Visa and Mastercard. he investigation ultimately led to trade measures against certain Brazilian goods, with digital payment policies among the issues examined. The episode underscores a debate India has also confronted: there is no free lunch in payments.
On August 6, the Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026, amending the six-year-old provision that prohibited Merchant Discount Rate charges on UPI and RuPay debit transactions. The amendment enables the government to notify fees at a future date through executive order. The move reflects a growing recognition that a payments ecosystem of UPI’s scale cannot rely indefinitely on subsidies. In the last financial year alone, UPI processed about 241.6 billion transactions worth $3.29 trillion, making it one of the world’s largest digital payment networks. Yet with fiscal resources under pressure and transaction volumes continuing to surge, sustaining the subsidy at earlier levels has become increasingly difficult and the budgetary support for the zero-MDR regime has fallen sharply from ₹3,500 crore in FY24 to under ₹430 crore this year, even as transaction volumes have tripled. Industry estimates place the annual cost of operating the ecosystem—including settlement, fraud monitoring, compliance and customer support—at nearly ₹10,000 crore, or about 50 paise per transaction. The debate is therefore no longer about whether UPI should be funded, but who should bear the cost.
Consumers are understandably wary of any move that appears to threaten UPI’s free-to-use model. Yet the proposed framework does not envisage charges on peer-to-peer transfers or small merchants. Instead, discussions have centred on a modest MDR of five to seven basis points on UPI transactions above ₹2,000 and only for merchants with annual turnover exceeding ₹1–1.5 crore. Most street vendors, small businesses and kirana stores are therefore excluded by design. For organised retailers which already pay MDRs of up to 1.5 per cent on credit cards and 0.9 per cent on non-RuPay debit cards, such a charge is unlikely to materially affect profitability.
Who gains from a limited MDR? While payment firms and aggregators may benefit, the larger prize lies in lending. UPI transaction data is enabling banks to underwrite small merchants, gig workers and first-time borrowers who were previously outside the formal credit system. Credit Line on UPI has already crossed ₹10,000 crore in monthly transactions, while an NBER study found that UPI-driven credit expansion improved access to formal finance without increasing default rates. In this context, MDR revenue is merely the enabler; the real payoff is deeper financial inclusion through sustainable digital lending.
The proposal has received the tacit support of the Confederation of All India Traders, provided small merchants remain protected. However, implementation will not be without challenges. Large merchants may pass on part of the cost to consumers, while some businesses could restructure operations to remain below the turnover threshold. Even a modest MDR could slow transaction growth or weaken incentives for digital acceptance at the margin. The success of the reform will therefore depend on careful calibration, effective monitoring and periodic review.
Globally, India would hardly be an outlier. Brazil’s Pix charges merchant fees and still became the country’s dominant payment system within five years. China’s Alipay and WeChat Pay derive much of their revenue from adjacent financial services, particularly lending—an ecosystem that Indian banks are increasingly building around UPI. Even if a limited MDR is introduced, India’s merchant-payment costs would remain among the lowest in the world.
India’s decision six years ago to eliminate MDR helped UPI achieve unprecedented scale. The challenge now is different: ensuring that a system handling trillions of dollars annually remains financially sustainable. A carefully targeted fee on large merchants is not a retreat from the UPI success story; it is the price of ensuring that the world’s most successful digital payments experiment can sustain its next phase of growth.