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Subject: “Digital Payments,Digital Infrastructure”

  • Govt exploring MDR to make UPI self-sustaining

    Why in the News?

    The government told Parliament that the current Unified Payments Interface (UPI) model is financially unsustainable, and that it is examining two routes to make the platform self-supporting without inflating the Budget. The trigger exposes a core tension: the zero-charge design that drove mass adoption now starves the ecosystem of the revenue needed for cybersecurity, fraud prevention and network upkeep.

    What is Unified Payments Interface (UPI)?

    1. Definition: UPI is a real-time payment system built by the National Payments Corporation of India (NPCI) and the Indian Banks’ Association that lets money move instantly between two bank accounts through a mobile app. It was launched as a pilot in April 2016 and became fully operational in August 2016.
    2. Scale: More than 55 crore people use UPI and 703 entities, from banks to payment service providers, facilitate its transactions. Of the 28,174 crore digital transactions recorded in 2025-26, 86% ran on UPI.

    What is the Merchant Discount Rate (MDR)?

    1. Definition: MDR is the fee that banks, payment processors and gateways levy on a merchant for accepting a digital payment.
    2. Current position: MDR is charged on most debit card and all credit card transactions. UPI and RuPay debit card transactions were exempted in 2020, making them zero-cost for merchants.

    What Makes Up MDR?

    1. Interchange fee: Money sent to the customer’s card-issuing bank.
    2. Network fee: Charges paid to card networks like Visa or Mastercard.
    3. Processor fee: Markup kept by the payment gateway or processor for handling the tech

    Why is the current UPI model financially unsustainable?

    1. Cost recovery gap: The subsidy scheme reimbursing processors is far short of actual cost. There is a mismatch between the roughly Rs 2,000 crore allocation and the industry’s estimated operational cost of about Rs 20,700 crore a year.
    2. Coverage shortfall: The Standing Committee on Finance found the incentive covers merely 11% of the industry’s actual costs and 14% of potential MDR collections.
    3. Investment risk: The gap threatens critical spending on cybersecurity, fraud prevention and network infrastructure as volumes scale toward a projected 150 billion transactions per month.

    What options is the government exploring?

    1. Selective MDR: Restoring MDR on certain high threshold transactions and high turnover merchants, leaving small merchant payments untouched.
    2. Tiered incentives: A tiered incentive structure to phase out government support over the next few years.
    3. Legal enabler: An amendment to the Payment and Settlement Systems Act, 2007 has already removed the bar on charging merchants a fee for receiving UPI payments.
    4. Industry proposal: Payment firms seek an MDR of 0.3% to 0.6% on payments above Rs 2,000 to large merchants, about 4% of person to merchant transactions but 68% of value.

    Conclusion

    The government has confirmed that UPI cannot indefinitely run on subsidies and is examining selective MDR and a tapering incentive structure to make it self-sustaining. The next milestone is a framework that funds the ecosystem through charges on large merchants while shielding small merchants.

    [UPSC 2026] Which one of the following statements about Unified Payments Interface (UPI) and Central Bank Digital Currency (Digital Rupee) is NOT correct?

    (a) UPI is a real-time payment system but Digital Rupee is akin to sovereign paper currency

    (b) In case of UPI, settlement for end users happens instantly; in case of Digital Rupee, wallet balance gets transferred to another wallet

    (c) UPI transactions are recorded by banks and reflected in bank statements; in case of Digital Rupee, no data is captured in bank statements

    (d) In both the cases, the liability lies with the users and their respective banks.

    Answer: D

  • As AI threat loomed, UPI players flagged rising security costs

    Why in News?

    UPI platforms have flagged rising cybersecurity costs, especially from AI-enabled fraud, renewing demands to allow Merchant Discount Rate (MDR) on UPI.

    What is MDR?

    • MDR: Fee paid by merchants to banks/payment providers for processing digital payments.
    • UPI: MDR is currently zero, so merchants pay no transaction fee.
    • Costs are borne by banks, payment apps and government reimbursements.

    Why are Security Costs Rising?

    • AI-enabled fraud can make sophisticated cyberattacks cheaper and easier.
    • Security accounts for 20%+ of UPI platform costs.
    • Security infrastructure costs around 10 to 20 paise per transaction.
    • Dependence on imported AI/cloud tools adds dollar and currency risks.
    • Rising transaction volumes keep security expenditure high.

    Why Allow MDR?

    • UPI infrastructure is not costless and someone must bear its cost.
    • Reduces dependence on uncertain government subsidies.
    • Provides dedicated funding for cybersecurity and system resilience.

    Concerns

    • Fees on small-value transactions could push users back to cash.
    • Higher costs may disproportionately affect price-sensitive consumers.
    • Poorly designed MDR could weaken UPI’s role as a public digital infrastructure.
    • Foreign AI security tools create strategic and currency dependence.

    UPI: Back2Basics

    • UPI: Real-time interbank payment system developed by NPCI.
    • Enables instant P2P and P2M payments.
    • NPCI: Umbrella organisation for India’s retail payment systems, established in 2008.
    • Key systems: UPI, RuPay, IMPS, BBPS and FASTag.
    • Regulated by RBI under the Payment and Settlement Systems Act, 2007.

    “[2026] Which one of the following statements about Unified Payments Interface (UPI) and Central Bank Digital Currency (Digital Rupee) is NOT correct?

    (a) UPI is a real-time payment system but Digital Rupee is akin to sovereign paper currency

    (b) In case of UPI, settlement for end users happens instantly; in case of Digital Rupee, wallet balance gets transferred to another wallet (no traditional settlement)

    (c) UPI transactions are recorded by banks and reflected in bank statements; in case of Digital Rupee, no data is captured in bank statements

    (d) In both the cases (UPI and Digital Rupee), the liability lies with the users and their respective banks

  • Seamless digital payments have a price / UPI and the cost of policy reversal

    Why in the News

    Parliament has passed the Taxation and Other Laws (Amendment) Bill, 2026, allowing a legal framework for possible charges on Unified Payments Interface (UPI) and RuPay debit card transactions. The debate centres on whether digital payments should remain free to promote inclusion or adopt a sustainable funding model.

    What is UPI?

    • UPI: Unified Payments Interface.
    • Enables instant bank-to-bank payments through mobile applications.
    • Operated by the National Payments Corporation of India (NPCI).
    • Processed 23.6 billion transactions in July.

    What is Merchant Discount Rate (MDR)?

    • MDR: Merchant Discount Rate.
    • A fee charged for processing digital payments, generally paid by merchants.
    • Credit-card MDR: around 1-3%.
    • Debit-card MDR: up to 0.9%.
    • UPI has followed a zero-MDR regime since 2020.

    What Does the 2026 Bill Do?

    • Amends Section 10A of the Payment and Settlement Systems Act, 2007.
    • Creates legal space for the government to notify charges on specified electronic payment modes.
    • A proposed MDR of 0.25-0.5% has been discussed for UPI transactions above ₹2,000.
    • This could cover about 5% of transactions by volume but around 65% by value.
    • The government has stated that consumers and small merchants will not bear MDR and the final framework is yet to be decided.

    Why is Zero-MDR Considered Unsustainable?

    1. Infrastructure costs: Huge transaction volumes require continuous investment.
    2. Fraud prevention: Cybersecurity and fraud-control systems require funding.
    3. Government support: ₹8,730 crore was provided through incentives during 2021-22 to 2024-25.
    4. Funding gap: This covered only a limited share of industry costs.
    5. Market concentration: PhonePe and Google Pay together account for around 80% of UPI transactions.

    What is a Two-Sided Market?

    • A platform connecting two groups whose participation reinforces each other.
    • UPI: Consumers ↔ Payment platforms ↔ Merchants
    • More users attract more merchants, while more merchants attract more users. Therefore, imposing a charge on one side may reduce the network effect.

    Why Could MDR Affect UPI?

    Arguments for charges

    • Provides sustainable revenue for infrastructure.
    • Supports innovation and fraud prevention.
    • May attract more competitors into the UPI ecosystem.

    Arguments against charges

    • Could discourage merchants and consumers from using digital payments.
    • Intermediaries may absorb the cost rather than pass it on.
    • Could weaken India’s financial inclusion and formalisation gains.
    • May encourage a shift back towards cash.

    About India’s Digital Payments Ecosystem

    • RBI: Reserve Bank of India, the regulator.
    • NPCI: National Payments Corporation of India, operator of major retail payment rails.
    • Banks and fintechs: Participate as payment service providers.
    • UPI: Real-time account-to-account payment system.
    • RuPay: India’s domestic card payment network.

    Statutory Framework

    • Payment and Settlement Systems Act, 2007: Regulates payment systems under RBI supervision.
    • Section 10A: Provides the framework for charges on specified electronic payment modes.
    • RBI Act, 1934: Establishes the Reserve Bank of India.
    • Information Technology Act, 2000: Provides legal recognition to electronic records and authentication.

    Back2Basics: NPCI

    • Full form: National Payments Corporation of India.
    • Established: 2008.
    • Nature: Not-for-profit company.
    • Promoted by: Banks under the guidance of RBI and Indian Banks’ Association (IBA).
    • Key systems: UPI, RuPay, Immediate Payment Service (IMPS), FASTag and Bharat Bill Payment System (BBPS).

    Government Initiatives

    • UPI Incentive Scheme: Supports the cost of low-value UPI transactions.
    • Digital India Programme: Expands digital infrastructure and inclusion.
    • BHIM: Bharat Interface for Money, NPCI’s UPI application.
    • RuPay: Domestic card network.
    • JAM: Jan Dhan-Aadhaar-Mobile trinity supporting digital transfers and financial inclusion.

    “[2026] Which one of the following statements about Unified Payments Interface (UPI) and Central Bank Digital Currency (Digital Rupee) is NOT correct?

    (a) UPI is a real-time payment system but Digital Rupee is akin to sovereign paper currency

    (b) In case of UPI, settlement for end users happens instantly; in case of Digital Rupee, wallet balance gets transferred to another wallet (no traditional settlement)

    (c) UPI transactions are recorded by banks and reflected in bank statements; in case of Digital Rupee, no data is captured in bank statements

    (d) In both the cases (UPI and Digital Rupee), the liability lies with the users and their respective banks

  • Government moves toward charges on UPI, sparking an MDR debate

    Why in the News

    A government move that could permit charges on Unified Payments Interface (UPI) transactions has revived the question of a Merchant Discount Rate (MDR). The tension is between funding the rising cost of a free public payments rail and preserving the zero cost model that drove its mass adoption.

    What is the Merchant Discount Rate (MDR)?

    1. Definition: The MDR is the fee a merchant pays a bank for accepting a digital payment from a customer.
    2. Current position: MDR on UPI and RuPay debit card payments has been zero since 2020, shifting the settlement cost onto the system.

    How would the proposed charge actually work?

    1. Large merchants only: Any MDR would apply to person to merchant (P2M) payments above a threshold, not to small traders.
    2. Enabling law: The change is routed through the Taxation and Other Laws (Amendment) Bill 2026.

    What is the case against charging for UPI?

    1. Adoption risk: A fee could push small merchants back toward cash and reverse formalisation gains.
    2. Alternative funding: The RBI’s surplus could subsidise the payments rail instead of a merchant levy.

    What are the pressures forcing the question?

    1. Scale cost: Processing billions of monthly transactions imposes real infrastructure and settlement costs on banks.
    2. Sustainability: A permanently free model leaves no revenue to maintain and expand the network.

    “[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.

  • Taxation and Other Laws (Amendment) Bill and the UPI levy

    Why in the News

    The Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026 on 6 August 2026. The Bill gives legal backing to modify the zero charge regime on some digital payments. Analysis links the move to United States trade pressure over digital payment barriers.

    What is the zero Merchant Discount Rate regime on UPI and RuPay?

    1. Merchant Discount Rate (MDR): the fee a merchant pays to banks and card networks for processing a digital payment.
    2. Zero MDR rule: since 2020 India has barred any charge on Unified Payments Interface (UPI) and RuPay debit card transactions.
    3. Effect on users: UPI stays free at the point of payment, which drove mass adoption.
    4. Bill change: the amendment removes the link between the Payment and Settlement Systems Act, 2007 and the Income Tax Act, and lets the government modify the zero charge regime.
    5. Scope: any charge would apply to merchants, not end users, and the steering committee headed by the National Payments Corporation of India (NPCI) is yet to decide.

    What else does the Bill do?

    1. Manufacturing: it aims to promote domestic electronics manufacturing.
    2. Foreign capital: it replaces a June ordinance that exempted interest income and capital gains earned by Foreign Portfolio Investors from government securities.

    Why is the change linked to United States trade demands?

    1. Section 301 lever: the United States Trade Representative (USTR) runs a Section 301 investigation, a tool to act against foreign trade barriers.
    2. Barrier tag: in March 2026 USTR classified India’s digital payment policies as favouring domestic players.
    3. Lost business: Visa and Mastercard cite lost potential business as Indian consumers shifted to free UPI.
    4. Market cap concern: USTR flagged that two United States owned providers processed over 80 percent of UPI transactions, alongside the 30 percent cap on third party apps.
    5. Precedent: India earlier scrapped the 6 percent equalisation levy on digital services under similar pressure.

    What are the concerns around the levy?

    1. Adoption risk: charges could slow UPI use if passed to merchants and then to prices.
    2. Policy autonomy: critics read the change as a concession under trade negotiation rather than domestic reform.
    3. Revenue pool: an interoperable zero cost platform limits card network fee income, which the change could restore.

    [2026] Which one of the following best describes the key objective of India’s ‘Open Network for Digital Commerce’ (ONDC) initiative?
    (a) To allow digital government control over all digital commerce transactions
    (b) To replace private e-commerce players
    (c) To break the dominance of large e-commerce platforms by enabling interoperability across networks
    (d) To mandate UPI-based payments for all online transactions

  • Debate over who pays for UPI as the Taxation Bill enables charges on high value merchant transactions

    Why in the News

    The Taxation and Other Laws (Amendment) Bill, 2026 proposes to allow the government to impose Merchant Discount Rate (MDR) on selected Unified Payments Interface (UPI) transactions, reviving the debate over how India’s digital payments infrastructure should be financed.

    What is the Merchant Discount Rate (MDR)?

    • Transaction fee: The Merchant Discount Rate (MDR) is the fee charged to merchants by banks and payment service providers for processing digital payments.
    • Who pays? It is generally borne by the merchant, not the customer.
    • Current position: Since January 2020, UPI and RuPay debit card transactions have zero MDR, making them free for merchants and users.
    • Government support: The government has compensated service providers through incentive schemes to sustain the digital payments ecosystem.

    What does the Bill propose?

    • Enabling provision: The Taxation and Other Laws (Amendment) Bill, 2026 relaxes the existing restrictions on MDR.
    • Selective application: It empowers the government to notify specific UPI transactions on which MDR may be levied.
    • Likely scope: Discussions indicate the levy may apply to:
      • Merchants with high annual turnover, and
      • High value transactions above ₹2,000.
    • Objective: Ensure a financially sustainable digital payments ecosystem while protecting small merchants.

    Who should bear the cost of UPI?

    • Government funding: Continue compensating payment providers through budgetary support.
    • RBI surplus: The Reserve Bank of India’s surplus transfer could partly finance UPI infrastructure.
    • Banks and payment providers: Costs may be absorbed by financial institutions.
    • Merchants: Large merchants could bear MDR without affecting small businesses.
    • Policy challenge: Balance financial sustainability, merchant affordability, and continued digital payment adoption.

    Prelims Pointers

    • Merchant Discount Rate (MDR) is the fee paid by merchants for processing digital payment transactions.
    • UPI is operated by the National Payments Corporation of India (NPCI).
    • NPCI is an umbrella organisation for retail payment systems in India, established by the Reserve Bank of India (RBI) and the Indian Banks’ Association (IBA).
    • Zero MDR on UPI and RuPay debit card transactions has been in force since 2020.
    • The RBI periodically transfers its surplus to the Central Government under the provisions of the RBI Act, 1934.

    “[2025] Consider the following countries:
    I. United Arab Emirates
    II. France
    III. Germany
    IV. Singapore
    V. Bangladesh
    How many countries amongst the above are there other than India where international merchant payments are accepted under UPI?
    (a) Only two
    (b) Only three
    (c) Only four
    (d) All the five

  • What is the status of digitalization in the Indian economy? Examine the problems faced in this regard and suggest improvements.

    India is undergoing rapid digital transformation driven by Digital India, affordable data, and expanding digital public infrastructure.

    Status of Digitalization in the Indian Economy

    India is the third largest digitalised country (State of India’s Digital Economy Report 2024).

    The digital economy contributes 11.74% of national income. Projected to exceed agriculture and manufacturing in <6 years.

    Growing @ CAGR of 20%.

    Employs 14.67 million workers (2.55% of workforce).

    E-commerce market projected to touch USD 150 billion by 2026

    UPI handles over

    E-governance – GeM portal, DigiLocker, e-Visa, DESH-Stack portal, etc

    Sectoral contributions:

    Digital-enabling industry: 7.83% of GVA (highest).

    New digital industries: ~2% of GVA (Big Tech, platforms, intermediaries).

    Traditional sectors (BFSI, trade, education): ~2% of GVA.

    Problems in Digitalization

    Digital divide – rural-urban, gender, income gaps.

    Only 20% digitally literate (NFHS-5)

    Connectivity issues – slow BharatNet rollout, poor last-mile fibre.

    Cybersecurity risks – rising digital fraud, weak cyber hygiene. Eg- Aadhar Data breach

    Data protection concerns – gaps in implementation under DPDP Act.

    Low MSME digital adoption due to cost barriers, limited awareness.

    Digital monopolies – dominance of Big Tech in new digital industries.

    Way Forward

    Accelerate BharatNet and improve last-mile fibre and 5G coverage.

    Scale digital literacy via PMGDISHA 2.0.

    Strengthen cybersecurity through CERT-In capacity, digital hygiene campaigns, and privacy-by-design.

    Support MSME digitalization via incentives, cloud credits, and ONDC onboarding.

    Promote multilingual digital content for inclusion.

    Effective implementation of the Digital Personal Data Protection Act, 2023

    Harnessing digital economy with focus on 3 I’s – Infrastructure, Investment, Innovation can realise the vision of Knowledge Economy @2047

  • Consider the following statements

    Consider the following statements:

    1. National Payments Corporation of India (NPCI) helps in promoting the financial inclusion in the country.
    2. NCPI has launched RuPay, a card Payment scheme.

    Which of the statements given above is/are correct?

  • Consider the following

    Consider the following :
    1. Aarogya Setu
    2. CoWIN
    3. DigiLocker
    4. DIKSHA
    Which of the above are built on top of open-source digital platforms ?

  • Consider the following countries

    Consider the following countries:
    I. United Arab Emirates
    II. France
    III. Germany
    IV. Singapore
    V. Bangladesh
    How many countries amongst the above are there other than India where international merchant payments are accepted under UPI?