With the government’s Rs 2,000 crore support covering only a fraction of the UPI ecosystem’s estimated Rs 20,700 crore annual operational cost, the Centre is exploring MDR or a phased incentive model to make India’s digital-payments giant financially sustainable
India’s UPI success story is entering a new phase — one where scale alone may no longer be enough to sustain the world’s largest real-time payments ecosystem.
The Finance Ministry has told a Parliamentary Standing Committee on Finance that it is examining two options to address the growing financial burden of running UPI: restoring the merchant discount rate (MDR) for select high-value transactions or merchants, or introducing a tiered incentive structure that gradually reduces government support over the next few years.
The underlying problem is stark.
The government has allocated Rs 2,000 crore to incentivise UPI transactions and compensate for losses arising from zero MDR. But the industry’s estimated operational cost stands at around Rs 20,700 crore.
In other words, government support currently covers only a fraction of the cost of keeping the UPI ecosystem running.
The economics behind India’s UPI revolution
UPI’s extraordinary growth was built partly on a simple proposition: digital payments should be free and frictionless.
The Centre abolished MDR on UPI transactions in January 2020 to accelerate digital-payment adoption and push consumers and merchants away from cash.
The strategy delivered spectacularly on adoption. But it also created an unusual economic model — a payment network handling enormous transaction volumes without a conventional transaction-based revenue stream.
More from BusinessThat model becomes increasingly difficult to sustain as UPI scales.
The Parliamentary panel expects UPI to potentially process 150 billion transactions a month and add around 600 million new users. At that scale, even tiny per-transaction costs can translate into enormous expenses for banks, payment service providers and the broader payments infrastructure.
The committee has therefore warned that continued dependence on inadequate subsidies could eventually affect investments in cybersecurity, fraud prevention and network infrastructure.
Why MDR is back on the table
MDR of up to 0.30 per cent was applicable to UPI merchant transactions until 2019. Its abolition helped create the foundation for mass adoption, but it simultaneously removed an important revenue source for the ecosystem.
The government is now looking at whether that model can be partially reversed without making UPI expensive for ordinary users.
The emerging approach appears to be targeted rather than universal: **high-value merchant transactions could attract a nominal MDR above a specified threshold**, while consumers continue to use UPI without a transaction charge.
The recently amended Payment and Settlement Systems Act, 2007, has also created a statutory pathway for calibrated charges on electronic payments. However, the government has not yet operationalised MDR.
The final structure and threshold are expected to be decided by the UPI and Services Steering Committee headed by NPCI.
The bigger question: who pays for UPI?
This is ultimately less a debate about a few basis points of MDR and more about the economics of India’s digital public infrastructure.
The government wants UPI to remain cheap enough to preserve its network effect. Payment companies want compensation that reflects the cost of maintaining the system. Large merchants benefit from faster payments and lower transaction costs, while consumers have become accustomed to zero-cost digital transactions.
The current Rs 2,000-crore support against an estimated Rs 20,700-crore cost shows how wide that gap has become.
The challenge, therefore, is to monetise UPI without breaking the very model that made it successful. India may have solved the first problem — getting hundreds of millions of people onto digital payments.
Now comes the harder one: building a revenue model capable of paying for the infrastructure at the scale UPI has reached.
