A new study by professors at IIT-Bombay has reopened the debate over how India should price its fast-growing digital payments infrastructure, recommending a sharp reduction in the Merchant Discount Rate, or MDR, on UPI transactions. The report argues that the current 0.40% charge is too high for a system that has become a public utility in practice, and says the rate should be cut to 0.08% for third-party application providers.
The recommendation is significant because UPI has become the backbone of retail digital payments in India, spanning everything from small-ticket consumer purchases to mobility, fuel, parking and other everyday transactions. For sectors such as automotive and EV mobility, where digital acceptance is increasingly embedded into charging, parking, tolling and service workflows, the economics of payment acceptance can influence how quickly merchants adopt cashless systems at scale.
MDR Reset Debate
The IIT-Bombay study is notable not only for the size of the proposed cut, but also for the policy logic behind it. The professors appear to be arguing that the current fee structure does not reflect the public nature of UPI adoption, especially after years of state-backed expansion and consumer habituation. In their view, the ecosystem should be designed to keep merchant costs low enough to sustain broad acceptance without discouraging innovation or service quality.
At the centre of the proposal is a rebalancing of who earns what from a UPI transaction. The study recommends that third-party application providers should receive 0.08% rather than the present 0.40%, a move that would compress the fee pool substantially. Such a change would likely be welcomed by merchants and smaller businesses that have long argued that payment acceptance costs should remain minimal in a system built for scale and inclusion.
The report also takes aim at the assumption that banks should depend on transaction fees as a major source of income from UPI. Instead, it suggests that banks should use funds from their CASA, or current account and savings account, deposits to support the infrastructure and operational burden associated with digital payments. That argument reflects a broader policy view that banks benefit from the deposit base and customer relationships generated by digital usage, and therefore should not extract a large share from each transaction.
Banks, Deposits, Trust
The study's emphasis on CASA deposits is important because it shifts the discussion from per-transaction monetisation to balance-sheet economics. In effect, the report is saying that banks already enjoy low-cost funding from retail deposits and should leverage that advantage to support payments infrastructure, rather than treating UPI as a direct fee-generating product. This could have implications for how banks assess the profitability of digital payments and how they negotiate their role in the UPI value chain.
The report also underscores a less visible but crucial issue: trust. It says the ecosystem needs the development of necessary services to improve confidence in digital payments. That likely points to better dispute resolution, reliability, fraud controls, customer support and merchant-side service quality. In a market where adoption is already high, the next phase of growth depends less on awareness and more on the consistency and safety of the experience.
For the mobility sector, the policy direction matters because digital payments are increasingly tied to operational efficiency. EV charging networks, app-based parking, fleet services and connected vehicle commerce all depend on low-friction payment rails. If MDR remains elevated, smaller merchants and infrastructure operators may be slower to expand acceptance points or may pass costs through indirectly. A lower MDR, by contrast, could support wider deployment and improve transaction economics across the ecosystem.
The IIT-Bombay recommendation arrives at a time when India is weighing how to preserve UPI's scale without undermining the commercial incentives needed to maintain it. That balance has become one of the central questions in digital payments policy: how to keep the consumer-facing system free or nearly free while ensuring that banks, payment firms and application providers can sustain operations, invest in security and continue innovating.
The report does not appear to be a formal government decision, but it adds academic weight to a policy conversation that has direct consequences for merchants, banks, fintech firms and consumers. If adopted in any form, the proposed MDR reset would mark a meaningful shift in the economics of India's digital payment stack, with ripple effects across retail commerce and mobility-linked transactions alike.