As Govt. mulls MDR on UPI, data shows cash usage quickening

Why in the News

The Taxation and Other Laws (Amendment) Act, 2026, passed in the concluded Monsoon Session, enables a Merchant Discount Rate on Unified Payments Interface and RuPay debit card transactions that are currently free. Data over the same period shows digital transaction growth decelerating while cash with the public rose to Rs 41.8 lakh crore. The tension is between making the payments system financially self sustaining and preserving the zero cost design that drove its adoption.

What is the Merchant Discount Rate?

1. About: The Merchant Discount Rate (MDR) is the charge a bank levies on a merchant for accepting a customer payment through a card or a digital payment instrument.
2. How it is split: The charge is shared between the card issuing bank, the acquiring bank and the network operator.
3. Current position in India: MDR on UPI and RuPay debit card transactions was set at zero in 2020, making the rails free at the point of acceptance.
4. What the Act changes: The amendment enables the government to permit an MDR on these instruments, reversing the zero charge position.

What do the payment and cash numbers actually show?

1. UPI value growth, decelerating: Growth fell from 133 per cent in 2019-20 to 95 per cent in 2020-21, 105 per cent in 2021-22, 20.3 per cent in 2025-26 and 18.7 per cent so far in 2026-27.
2. Cash growth, accelerating: Growth in cash with the public fell to about 4 per cent in 2023-24, then rose to 6.5 per cent in 2024-25, 12 per cent in 2025-26 and about 13 per cent in 2026-27.
3. Absolute cash level: Cash with the public stood at Rs 41.8 lakh crore as on 31 July 2026.
4. The anomaly: Digital payments and cash holdings are growing together, which contradicts the substitution assumption behind the zero MDR policy.

Why are digital payments and cash rising together?

1. Under counted inflation: If nominal transactions require more cash than measured inflation implies, the price index is understating actual price growth. Retail inflation was 4.45 per cent in July 2026 while wholesale inflation stood at 9.8 per cent.
2. Real growth explanation: A rate of real growth above 7 per cent expands nominal transaction demand for both cash and digital instruments at once.
3. Distress explanation: Rising cash holding is read as precautionary balances accumulating under high youth unemployment.
4. Measurement gap: The wholesale and retail inflation series have diverged by more than five percentage points, which is itself the evidence the competing explanations turn on.

What is contested about charging for UPI?

1. Government position: The charge will not fall on the general public and will apply only to certain high value transactions.
2. Opposition position: Merchants will pass the charge on to customers, so the incidence reaches the consumer regardless of who is billed.
3. Underlying fiscal problem: Zero MDR shifted the cost of running the rails onto banks and the exchequer through incentive payments, which is not indefinitely sustainable.
4. Adoption risk: Small merchants accepted UPI precisely because acceptance was costless, so a charge changes the acceptance calculation at the margin.

Challenges to the digital payments system

1. Cost recovery without an acceptance charge: Banks carry infrastructure costs with no transaction revenue on UPI. e.g. the annual incentive outlay the government has budgeted to compensate banks for zero MDR.
2. Concentration risk: Two applications account for the overwhelming majority of UPI volume. e.g. the National Payments Corporation of India repeatedly deferring its 30 per cent market share cap.
3. Fraud and mule accounts: Instant irreversible settlement makes recovery difficult once a payment is made. e.g. the rise in digital arrest and investment fraud cases routed through UPI collect requests.
4. Outage exposure: A single operator running the rails concentrates systemic failure risk. e.g. the intermittent UPI outages that halted merchant acceptance across the country in 2025.
5. Rural acceptance gap: Feature phone and low connectivity users remain outside the mainstream flow. e.g. limited uptake of UPI123Pay against smartphone based volumes.
6. Cash persistence in the informal economy: Cash remains preferred where transactions are deliberately unrecorded. e.g. cash with the public rising to Rs 41.8 lakh crore alongside record digital volumes.

Conclusion

The amendment converts a policy question about who pays for the payments system into an operative legal power, and the answer will determine whether acceptance keeps widening. The simultaneous rise in cash is the more important signal, since it suggests digital adoption has been additive rather than substitutive. The next milestone is the notification specifying which transaction categories will attract the charge and at what rate.

Back2Basics: National Payments Corporation of India

1. Set up in 2008 as an umbrella organisation for retail payments and settlement systems in India.
2. Incorporated as a not for profit company under Section 8 of the Companies Act, 2013, promoted by public and private sector banks.
3. Operates under the regulatory authority of the Reserve Bank of India, which draws its powers from the Payment and Settlement Systems Act, 2007.
4. Runs UPI, RuPay, Immediate Payment Service, National Automated Clearing House, National Electronic Toll Collection and Bharat Bill Payment System.
5. Established NPCI International Payments Limited in 2020 to take UPI and RuPay to overseas markets.

Way Forward

1. Define the threshold in the notification: State the transaction value above which the charge applies, so small merchant acceptance is not affected by ambiguity.
2. Cap the pass through: Prohibit merchant surcharging on transactions below the threshold, since incidence rather than billing decides the consumer effect.
3. Reconcile the inflation series: Investigate the divergence between retail and wholesale inflation before treating cash growth as evidence of either strength or distress.
4. Enforce the market share cap: Implement the volume cap on individual UPI applications to reduce concentration risk.
5. Fund the rails transparently: Publish the annual cost of running the zero charge system, so the trade off between an explicit charge and a budgetary subsidy is visible.

Matching Previous Year Question

“[2018] Which one of the following best describes the term Merchant Discount Rate sometimes seen in news? (a) The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank. (b) The amount paid back by banks to their customers when they use debit cards for financial transactions for purchasing goods or services. (c) The charge to a merchant by a bank for accepting payments from his customers through the bank’s debit cards. (d) The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Sale (PoS) machines and debit cards. Answer: (c)”