Keep UPI free. Fund it from the savings it generates

Why in the News

Parliament has passed the Taxation and Other Laws (Amendment) Bill, 2026, rewriting Section 10A of the Payment and Settlement Systems Act, 2007. That section barred any charge on Unified Payments Interface (UPI) and RuPay transactions. The amendment replaces the bar with an enabling provision, letting the government notify in future which payment modes may carry a charge. No charge is imposed today. The tension is that the cost of running UPI is real and the state’s compensating outlay is shrinking. The only fee instrument available for recovering that cost would be levied on the smallest transactions in the economy.

What is the Merchant Discount Rate?

1. Definition: The Merchant Discount Rate (MDR) is the percentage of a transaction value that a merchant pays for accepting a digital payment, deducted before the money reaches the merchant’s account.
2. Card world origin: It is an inheritance from card payments, with the card issuer, the acquiring bank and the network each taking a slice. A physical card, a terminal and credit default risk give the fee something real to recover.

What has the amendment to Section 10A actually changed?

1. From prohibition to permission: A statutory bar on charging has been converted into a discretionary power to allow charging on notified modes.
2. The trigger moves to the executive: Imposing a charge no longer needs Parliament, only a notification.
3. The status quo is unchanged today: No charge has been imposed on any mode as of the amendment.
4. Why it still matters: A right protected by statute and a right held at executive discretion are different guarantees for a merchant deciding whether to accept digital payment.

What has UPI become?

1. Volume and value: In 2025-26 UPI carried over 24,000 crore transactions, roughly 66 crore a day, worth about ₹314 lakh crore.
2. Share: It accounts for some 85 per cent of India’s digital retail payments and nearly half of the world’s real time payments.
3. Ticket size: The average transaction is about ₹1,300, and 86 per cent of merchant payments are below ₹500.
4. Who transacts: Payments at that size are made to the vegetable seller, the auto driver and the kirana shop, so a charge is a levy on the smallest transactions of the poorest rather than on commerce in the abstract.
5. What was achieved: No other country has made real time digital payment free, instant and universal, and the transition pulled hundreds of millions of Indians into the formal economy.

Why is UPI treated as public infrastructure rather than a company’s product?

1. Most used digital public good: After Aadhaar gave every Indian a digital identity, UPI is the most visible piece of digital public infrastructure, and the citizen reaches for it many times a day rather than once.
2. A protocol, not a platform: It is an open, protocol based public good, a shared language for money instead of any single firm’s product.
3. What the protocol did to banking: Before UPI each bank ran its own closed application. UPI asked banks only to open their programming interfaces to a shared protocol, so any application can move money between any two accounts at any two banks.
4. External validation: The model is being studied and adopted by other countries.

Why is the Merchant Discount Rate the wrong instrument for UPI?

1. The recoverable costs do not exist: The point of sale machine is the customer’s own phone, running on data he has already paid for. There is no card, no terminal, no credit risk, and settlement is instant.
2. The work done test: Telecom interconnection regulation pays a network only for the work it actually performs, and the same test applies to a payment rail.
3. The work actually performed: When A pays B, A’s bank makes a debit entry, the National Payments Corporation of India (NPCI) issues a settlement instruction, and B’s bank makes a credit entry. No cash moves at any point.
4. What that work costs: NPCI runs the entire switch for about ₹500 crore a year, which is some two paise a transaction.

The funding gap is real even where the fee is wrong

1. Providers earn nothing directly: Banks and payment providers bear real costs, and under zero MDR they receive nothing from a UPI transaction itself.
2. The bridge is being withdrawn: The government has covered the gap with an incentive, and the outlay is projected to fall to about ₹437 crore from about ₹3,631 crore two years ago.
3. Traffic is moving the other way: The volume the incentive supports is multiplying and the incentive itself is shrinking. The shortfall widens each year without any policy decision being taken.

Who actually captures the savings digitisation creates?

1. Currency printing: The Reserve Bank spends some ₹5,000 crore to ₹6,400 crore a year merely printing currency notes, which is more than the government spends keeping UPI free, before storage and movement of cash is counted.
2. Channel cost at the bank: A counter transaction costs a bank ₹40 to ₹50 and an automated teller machine (ATM) withdrawal costs ₹19 in interchange alone. A UPI transaction costs a small fraction of either.
3. The float: By making an account as usable as cash, UPI keeps money in accounts rather than idle in pockets, and that low cost float is what banks earn a spread on and lend against.
4. The mismatch: The beneficiary of digitisation is the state and the bank, and the party a merchant fee would tax is the merchant, so the instrument does not follow the benefit.

What would a Merchant Discount Rate cost the transition?

1. Price sensitivity: India is intensely price sensitive, and a digital payment costing even a rupee more than cash sends many users back to cash.
2. Pass through at the counter: A merchant charged MDR passes it on as a stated surcharge for digital, or refuses digital payment altogether.
3. Scale of the extraction: Even 0.3 per cent on merchant payments would take some ₹27,000 crore a year out of a thin margin retail economy.
4. Reversal risk: Telling a hundred crore users that what was always free now costs money is the surest way to slow, and even reverse, a transition still forming, collecting a little and losing a great deal.
5. A large merchant carve out will not hold: Confining the charge to large merchants offers no lasting protection, because thresholds slip and definitions widen.

What funding model could cover the cost without charging the user?

1. Return a share of the savings: The state, as steward of the public good and no longer obliged to print and move the cash UPI displaces, should return a small, defined share of its savings to those who run the rails.
2. Formula, not discretion: The support should be transparent and formula based, funded specifically from savings in currency management.
3. Not a subsidy: It is payment for value delivered, on the same principle by which the state pays a transmission company to carry electricity.
4. The price stays off the citizen: The design keeps the charge out of sight of the user, so no price tag ever appears in front of the person paying.

Challenges to keeping UPI free

1. The support is a Budget line, not an entitlement: An annual allocation can be cut without any change in law, so the guarantee is only as durable as one fiscal year. Eg. The incentive allocation has been cut sharply across two consecutive Budgets. Fix. Convert the support into a formula linked to measured currency management savings, so the amount tracks the service rather than the fiscal cycle.
2. Two applications carry most of the volume: Concentration lets a handful of private applications set the terms of access for banks and merchants. Eg. Two private applications account for roughly 80 per cent of UPI volume, and the market share cap on them has been deferred repeatedly. Fix. Fund interoperable merchant acquisition through smaller banks and the Bharat Interface for Money application to widen the base.
3. Charged rails already run beside the free ones: Credit products routed over the same interface carry a fee, so the free character of the system is already partial. Eg. From June 2026 a merchant discount rate applies to large value RuPay credit on UPI transactions. Fix. Publish a single schedule stating exactly which flows carry a charge, so a merchant sees the boundary before accepting a payment.
4. Fraud losses sit outside the pricing debate: The system’s real cost includes reimbursing victims, which no fee structure currently funds. Eg. Digital payment fraud losses have crossed ₹22,000 crore. Fix. Build a lagged credit window for high risk first time transfers, so a fraudulent transfer can be reversed before withdrawal.
5. Downtime carries no consequence: Bank side outages take users off the network at peak hours with no compensation obligation. Eg. Server downtime at major banks has repeatedly disrupted time sensitive payments. Fix. Set a published per bank uptime standard with penalties credited directly to affected users.

Conclusion

The statutory prohibition on charging for UPI is gone and the power to permit a charge now sits with the executive, even though no charge exists today. The cost of running the rails is genuine and the compensating outlay is falling, so the funding question cannot be deferred much longer. The unresolved choice is between recovering that cost from the merchant, which taxes the smallest transactions and risks reversing adoption, and recovering it from the currency management savings the state already books because UPI exists.

“[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.