Opinion | UPI’s MDR Return Was Inevitable. The Real Surprise Is That It Took This Long

If the government is indeed considering bringing back a merchant discount rate (MDR) on large-value UPI transactions, it is effectively acknowledging what banks and payment companies have been saying for years: somebody has to pay for the infrastructure.When the MDR was abolished in 2020, it helped turbocharge UPI adoption.

Merchants had every reason to push digital payments and consumers embraced them with remarkable speed. That policy achieved its objective.But it also created a business model with an obvious flaw.Every UPI payment may look effortless to the consumer, but behind that QR code sits an expensive network maintained by banks, NPCI and payment companies. Servers have to be upgraded, fraud monitored, disputes resolved and transactions settled around the clock. None of this comes free.

The problem is that the revenue disappeared just as transaction volumes exploded.Banks have lived with this because deposits and customer relationships still matter. Fintechs have had it tougher. They have spent years chasing lending, wealth management and advertising revenues because payments by themselves simply do not pay the bills.That is why the reported proposal deserves attention. It is not about taxing digital payments. It is about making the ecosystem economically viable.

The proposal, as reported by Moneycontrol, is narrowly targeted. It applies only to large merchants and only to transactions above Rs 2,000. That distinction matters. The neighbourhood grocery store or roadside tea shop is unlikely to be affected. The burden shifts instead to organised retailers and businesses that have arguably benefited the most from India’s digital payments revolution.

Will some merchants complain? Certainly. Retailers have never liked MDR, whether on cards or UPI.But there is another side to this debate. Large businesses routinely pay for logistics, cloud computing, payment gateways and software services because these are business costs. Digital payment acceptance is no different. Expecting that service to remain permanently free was always an anomaly.

For banks, the move could reopen a revenue stream that vanished overnight six years ago. For payment companies, it offers something even more valuable—a chance to build a payments business that is commercially sustainable rather than one that depends on cross-selling other financial products.The larger message is equally important.India has proved that it can build the world’s most successful real-time payments system.

The harder task now is ensuring that the ecosystem remains financially healthy as transaction volumes continue to climb.The success of UPI should not be measured only by the number of payments it processes every month. It should also be measured by whether the institutions running the rails have enough economic incentive to keep investing in them.That debate has been postponed for years.It now appears the government is finally ready to have it.