A report by professors at the Indian Institute of Technology Bombay has reopened a critical debate over the economics of India's fast-growing digital payments system, recommending that the Merchant Discount Rate, or MDR, on Unified Payments Interface transactions be reduced sharply to 0.08% from the current 0.40% for third-party application providers.
The proposal is significant because it challenges the current revenue-sharing structure that underpins digital payments and could reshape how costs are distributed across banks, payment apps and merchants. The study argues that the present fee level is too high for a system that is meant to scale rapidly, especially in a market where UPI has become the default mode of low-value retail payments. By lowering the charge, the authors contend, the ecosystem could become more sustainable, more competitive and more attractive for merchants that currently operate on thin margins.
Fee Reset Debate
The report's central recommendation is not merely a technical adjustment. It is a policy signal that the economics of digital payments may need to be recalibrated if India wants to preserve UPI's momentum without burdening merchants or distorting incentives. At 0.40%, MDR can appear modest in isolation, but for high-volume, low-ticket businesses such as fuel stations, small retailers, mobility operators and service providers, the cumulative cost can be meaningful. A cut to 0.08% would materially reduce the friction of acceptance and could encourage wider adoption across sectors that depend on quick, low-cost transactions.
The study also appears to draw a distinction between the role of third-party application providers and the role of banks. In effect, it suggests that payment apps should be compensated at a lower rate, while banks should not expect transaction fees to be a core source of income from UPI flows. That is a notable departure from a model in which multiple participants in the payments chain seek a share of the transaction economics.
For the automotive and mobility ecosystem, the implications are direct. UPI has become central to payments at fuel pumps, toll-linked services, parking, charging stations and app-based mobility platforms. Any reduction in MDR could improve merchant acceptance and lower operating costs for businesses that process large volumes of small payments. That, in turn, may help accelerate digital adoption in segments where cashless transactions are already common but cost sensitivity remains high.
Banks, Deposits, Trust
The report goes further by arguing that banks should not depend on transaction fees and should instead use funds from CASA deposits — current account and savings account balances — to support their role in the payments ecosystem. This is a significant policy suggestion because it reframes UPI not as a fee-generating product, but as part of a broader banking relationship in which low-cost deposits help finance infrastructure and service delivery.
In practical terms, the recommendation reflects the view that banks benefit from the wider digital ecosystem even when a single transaction does not generate direct revenue. UPI drives account activity, customer stickiness and broader financial engagement, all of which can support banking relationships over time. The study's logic is that banks should be compensated through the economics of deposits and customer acquisition rather than by extracting a larger share from each payment.
The report also stresses the need to develop essential services that build trust in digital payments. That point is important because UPI's success has not eliminated concerns around fraud, failed transactions, dispute resolution and user confidence. As transaction volumes rise, the quality of the surrounding infrastructure — including grievance redressal, authentication, reliability and merchant support — becomes more important than the headline fee itself.
The broader policy question is whether India wants UPI to remain a near-zero-friction public digital rail or evolve into a more commercial payments network with stronger monetisation for intermediaries. The IIT-Bombay study clearly leans toward the former, arguing that lower fees and stronger service layers would better support scale, trust and long-term ecosystem health.
For policymakers, the recommendation adds fresh academic weight to a debate that has already drawn attention from banks, fintech firms and merchants. For the payments industry, it raises a familiar but unresolved issue: who should pay for the infrastructure that powers India's digital commerce boom, and how much should each participant earn from it? The answer will shape not only the future of UPI, but also the economics of everyday transactions across the country.