A report has called for the proposed Merchant Discount Rate framework governing UPI transactions to undergo rationalisation ahead of any rollout, arguing that doing so is necessary to maintain public confidence in India's digital payments infrastructure.

A paper released by IIT Bombay under the title 'UPI at a Crossroads: Reintroducing the MDR' argued that UPI, functioning as shared public digital infrastructure, delivers user convenience and broader economic productivity gains whose cumulative value, over time, exceeds what merchant transaction fees could realistically bring in. The paper also contended that any fee framework for UPI ought to weigh wider economic dividends — among them gains in workforce productivity and the day-to-day convenience delivered to users across the public.

Under a circular released last month by the National Payments Corporation of India, any UPI transaction routed from a person to a merchant and valued above Rs 2,000 becomes subject to a Merchant Discount Rate of 0.4 per cent. Merchants, rather than consumers, bear responsibility for the fee, which tops out at Rs 300 once a transaction reaches Rs 75,000 or above. No charge is expected to apply to person-to-person transfers or to the everyday transactions that make up the bulk of merchant purchases.

A flat charge of Rs 5 per transaction applies to dealings above Rs 2,000 across sectors including railways, telecom, fuel, and insurance. For dealings in capital markets — mutual funds and stockbroking among them — a reduced levy of 0.02 per cent applies, with the total charge drawn no higher than Rs 300. A circular released by NPCI on September 15 introduced merchant discount rate provisions covering select UPI transactions, a step intended to build a financially sustainable foundation for the broader digital payments ecosystem.

The IIT Bombay advisory raised the prospect that adopting the MDR framework in its current configuration could erode user confidence in UPI, with the argument made that preserving goodwill toward the digital payments platform ought to remain a guiding consideration. The report contended that adjustments to the proposed framework were needed on two fronts — moderating its revenue-generation function while keeping UPI affordable and widely accepted by both users and merchants.

Under Indian law, businesses whose annual turnover reaches Rs 50 crore or above are required to accept payments through UPI. One proposal put forward in the paper would draw revenue from the UPI ecosystem by limiting merchant discount rate charges to businesses whose annual turnover clears Rs 50 crore — roughly Rs 4 crore each month — a threshold that, by NPCI's own projections, would capture around 90 per cent of the MDR it had outlined.

The paper also noted that NPCI could, within its legal mandate, move to levy fees on merchants handling online person-to-merchant UPI payments. For online retailers, who operate exclusively through digital channels and have no access to cash-based transactions, a levy of this kind would align more closely with the processing fees already associated with their digital payment infrastructure. Payments of this kind hold the potential to distribute earnings across every participant in the UPI ecosystem, with banks among those standing to benefit.

The document's recommendations included waiving MDR charges on transactions where UPI handles debt collection or loan EMI repayments. The report argued that exempting credit servicing and loan repayments from MDR calculations could lower the cost of settling debts digitally below that of cash or cheque transactions, while also easing friction for borrowers and broadening access to formal financial channels.

The report further called for the Reserve Bank to exercise its authority over merchant discount rate determinations for UPI transactions within the framework established by the Payment and Settlement Systems Act, 2007.