IIT-Bombay Report Advocates Reduction of UPI MDR from 0.4% to 0.08%, Urging Banks to Forego Their Share
With the recent announcement of a Merchant Discount Rate (MDR) on UPI transactions exceeding Rs 2,000, professors from IIT-Bombay have proposed a reduction in the MDR from 0.40% to 0.08%. The report, authored by Ashish Das and Pragya Das, argues that third-party application providers (TPAPs) and payment service providers (PSPs) should receive fair compensation for their services.
Proposed Changes to MDR Structure
The study suggests that the MDR share for TPAPs should be set at 0.06%, lower than the 0.08% proposed by the National Payments Corporation of India (NPCI), while maintaining the PSP share at 0.02%. Currently, banks that issue and acquire transactions receive a 70% share of the revenue, a structure the report criticizes as disproportionate. It claims that banks benefit significantly from lower interest rates paid by current and savings account depositors.
The report indicates that banks recorded a net interest margin of over Rs 4.85 lakh crore from CASA deposits in FY26, describing this as excessive compensation for limited services. It urges banks to utilize these margins to enhance the UPI ecosystem rather than relying on MDR revenue from offline transactions.
Recommendations for UPI Ecosystem
The authors recommend that banks allocate around 3% of the funds, estimated at Rs 15,000 crore, that CASA depositors forgo due to lower interest earnings. This allocation could be directed towards operating and upgrading the UPI ecosystem. The report also calls for the RBI and the government to mandate that banks treat UPI as an essential service, akin to the adoption of Core Banking Solutions.
Additionally, the report questions the rationale behind high transaction charges on significant UPI payments. It highlights that a charge of Rs 300 on a Rs 75,000 peer-to-merchant transaction raises concerns about the reasonableness of such fees.
Introduction of Digital Payment Fee
The report proposes a ‘digital payment fee’ for online transactions involving e-commerce purchases. It notes that many merchants already impose charges on transactions over Rs 2,000 and accept credit card payments. To alleviate the burden on UPI users, the authors suggest reducing credit card MDR.
The study also urges the RBI to reconsider the retention of fee-free ATM withdrawal allowances, arguing that such allowances are unjustifiable when digital payment options are widely available. It recommends the continuation of the Payments Infrastructure Development Fund (PIDF) to help payment aggregators onboard more merchants.
NPCI’s MDR Circular
According to a circular issued by NPCI last month, a merchant discount rate of 0.40% will apply to person-to-merchant UPI transactions exceeding Rs 2,000, with the fee borne by merchants. For transactions worth Rs 75,000 or more, the charge will be capped at Rs 300. Transfers between individuals and most routine payments will remain free, while transactions above Rs 2,000 for essential services will incur a flat fee of Rs 5. A lower MDR of 0.02% will apply to capital market transactions, capped at Rs 300. The NPCI’s circular aims to establish a sustainable revenue model for the digital payments ecosystem.
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