MDR on UPI might make a comeback—for large merchants

June 5, 2025

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A major policy shift may be on the horizon for India’s digital payments ecosystem. According to sources, the government is considering reintroducing Merchant Discount Rates (MDR) for UPI transactions—specifically targeting large merchants. While this move hasn’t been confirmed, it marks a significant departure from the zero-MDR regime that’s been in place since 2020.

For most consumers, UPI is synonymous with speed and ease. But for fintechs and startups building the infrastructure behind it, the story has been different. Without MDR, they’ve had no clear revenue model—forced to scale services that don’t directly pay.

This possible change, even if limited to high-volume merchants, could reshape the incentives, sustainability, and innovation trajectory within the startup ecosystem.

Why This Matters: A Chance to Monetise UPI Infrastructure

To understand the significance, it’s important to know what MDR actually is.

Merchant Discount Rate is the small percentage fee a merchant pays every time a digital transaction is processed through their platform—typically shared between the payment provider, the acquiring bank, and the payments network.

Globally, this is a standard revenue source for fintechs. But in India, the government eliminated MDR on UPI to drive adoption, especially among small merchants and consumers.

The zero-MDR policy did work—UPI exploded, becoming the most-used payment method in the country. But this growth came at a cost. Banks and payment startups have shouldered the operational burden with no direct monetisation.

This has hurt not only profitability but also slowed innovation. Many fintechs have relied on investor money to run infrastructure they can’t earn from—an unsustainable path in the long run.

If MDR is allowed—even in a small measure and only for large merchants—it could be a game-changer. It would give payment startups a legitimate revenue stream to build better products, improve uptime, and scale securely. It could also level the playing field a bit, reducing the outsized advantage enjoyed by deep-pocketed global players who can afford to operate at a loss.

More importantly, it would help make India’s digital payments ecosystem self-sustaining—less reliant on government subsidies or mandates.

What Startups Should Watch Out For

However, it’s not without risks. Many large merchants, especially in retail and food delivery, operate on razor-thin margins.

Even a small fee might push them to steer customers toward other payment methods—credit cards, wallets, or even cash. And for D2C startups that rely on large aggregators or payment platforms, these new costs may trickle down, impacting pricing or conversions.

Another concern is the ambiguity around definitions and execution. What qualifies as a “large merchant”? Will the MDR be capped? Who bears the cost—the platform, the merchant, or both?

Until these details are made public, the uncertainty itself could slow down decision-making or investment across the ecosystem. Still, if implemented thoughtfully—with carve-outs for small businesses and clarity on revenue distribution—this could finally bring balance to a model that has long needed one.

For founders in fintech, it may unlock new monetisation paths. For those in ecommerce or services, it’s a signal to start preparing for shifts in cost structures and customer payment behaviour.

Ultimately, this reported policy change may or may not go through. But its very consideration reflects a broader shift: that UPI’s infrastructure needs to be commercially viable to keep scaling.

For startups, the message is clear—watch this space, and be ready to adapt.

[This content is for informational purposes only and does not constitute legal, financial, or investment advice. This has been constituted based on third-party sources. We do not assume any liability for actions taken based on this information.