RBI Backs 0.4% UPI Merchant Fee Above Rs 2,000 to Ensure Long-Term Ecosystem Sustainability

The Reserve Bank of India (RBI) has formally endorsed the revised framework introducing a Merchant Discount Rate (MDR) on large-value Unified Payments Interface (UPI) transactions. The central bank described the move as an "important step" toward ensuring the long-term financial viability and technological resilience of India’s digital payment infrastructure.

The policy revision ends a multi-year zero-MDR regime implemented in January 2020 that made UPI transactions cost-free for merchants and users alike.

Key Details of the New MDR Framework

Under the structure outlined by the National Payments Corporation of India (NPCI) and backed by the central bank, transaction fees will take effect starting October 15, 2026:

• Transaction Threshold and Rate: A 0.4% MDR will apply strictly to Person-to-Merchant (P2M) transactions exceeding ₹2,000.
• Fee Cap: The fee is capped at ₹300 for merchant payments of ₹75,000 and above.
• User Protection: Person-to-Person (P2P) transfers and customer-facing payments remain completely free of any fee, regardless of amount.
• Small Merchant Exemption: P2M payments up to ₹2,000 remain free of MDR. Small vendors processing up to ₹1 lakh monthly via QR codes are also fully exempt, shielding an estimated 96% of total merchant transactions from fees.
• Sector-Specific Slabs: Essential utility payments, such as railways, fuel, and telecom, will carry a flat ₹5 fee per transaction, while capital-market transactions attract a reduced rate of 0.02%.

Why the RBI Supports Merchant Fees

Addressing the shift in an official statement on X, the RBI highlighted that an equitable distribution of MDR among payment service providers, acquiring banks, and issuing banks is indispensable for infrastructure upgrades.

"A fair and appropriate distribution of MDR across ecosystem participants will support continued investment in technology, infrastructure, and acceptance networks," the RBI said, adding that sustainable economics will enable wider acceptance, deepen the user base, and maintain long-term volume expansion.

Operating the national UPI network requires substantial ongoing capital expenditures for server load management, dispute resolution mechanisms, fraud monitoring, and cybersecurity. While the central government previously subsidized acquirers through annual budgetary support, industry participants noted that fiscal incentives could not permanently substitute an organic market-driven fee model.

Impact on Banks, Fintechs, and Investors

The introduction of the merchant fee is expected to reshape unit economics for listed fintech firms and acquiring banks. Payment aggregators and banks have historically operated UPI acceptance at a financial deficit, relying on cross-selling loans, soundboxes, and financial products to generate margins.

Brokerages note that transactions above ₹2,000 account for roughly two-thirds of total merchant payment value despite making up a small percentage of overall transaction volume. Monetizing this segment provides payment service providers like Paytm (One97 Communications) and acquiring lenders with a recurring pool of revenue to fund network expansion.

Regulators have barred payment applications from imposing supplemental platform fees and directed banks to ensure that merchants do not pass these MDR operational costs directly to consumers.

Tags: Reserve Bank of India National Payments Corporation of India Unified Payments Interface Fintech Banking Sector One97 Communications