The UPI Shake-Up Begins

by · Inc42

SUMMARY

  • UPI made digital payments almost invisible to consumers. Now, as merchants face MDR on select transactions, India’s payments revolution is entering a new, uncertain phase
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A customer scans a QR code at a neighbourhood shop, enters a passcode and the payment is done. Similarly, a wholesaler pays a supplier, friends split a dinner bill, and consumers buy groceries, all without handling cash.

Over the past decade, the QR code has quietly become one of the most visible symbols of Digital India. But India’s digital payments revolution is now entering a new phase.

From October 15, select high-value UPI payments will no longer be entirely free for merchants. Under the new framework, a 0.4% merchant discount rate (MDR) will apply to specified person-to-merchant UPI transactions above ₹2,000. The charge has been capped at ₹300 for transactions of ₹75,000 and above. The new framework has been introduced at a time when UPI has reached enormous scale. For context: UPI processed 24.51 Bn transactions worth ₹29.82 Lakh Cr in August alone.

This has created some uneasiness in the market, even as the government says around 96% of P2M UPI transactions will remain unaffected. According to the merchants Inc42 spoke with on the condition of ano nymity, the 0.4% MDR charge may not sound like much, but repeated across hundreds of transactions, it can take a visible bite out of margins. 

And that’s where UPI’s next chapter gets complicated. 

After years of encouraging businesses and consumers to embrace digital payments, the ecosystem is now being asked to pay up for the infrastructure. Consequently, FMCG distributors and retailers have raised concerns about the impact on their margins, while petrol pump dealers in several states have threatened to stop accepting UPI payments above ₹2,000 unless they are exempted. 

Fuel stations in Mumbai have sought a waiver, while dealers in Maharashtra are deliberating whether to accept UPI at pumps. Similarly, traders in Ghaziabad have already put up notices saying “UPI Payment Will Not Be Accepted” for transactions affected by the new MDR framework.

The merchant backlash is only one side of the UPI story, where scale, rather than monetisation, has been the protagonist for a decade. Now, with visible pushback from merchants, could UPI’s monetisation push once again change how Indians choose to pay?

Payments Were Never Truly Free 

Debit cards already carry an MDR for merchants, with RBI’s framework allowing charges of up to 0.9% for certain merchants with annual turnover above ₹20 lakh, while the ceiling for QR-code-based card acceptance is 0.8%. Credit cards typically carry higher merchant charges, given the interchange and other fees involved in the card ecosystem. Even cash comes with a cost. Once customers exhaust their free ATM withdrawal limit, banks charge around ₹23 per transaction. 

But UPI made that cost almost invisible.

For consumers, scanning a QR code has felt like the closest thing to a free payment system. There is no fee staring back at you at the point of purchase, no cash to count and no need to think about the machinery sitting behind the transaction.