A study by professors at IIT-Bombay has revived the debate over how India should fund and sustain its fast-growing digital payments infrastructure, recommending a sharp reduction in the Merchant Discount Rate, or MDR, on UPI transactions and a reallocation of who earns what from the payment chain. The report argues that the current MDR of 0.40 percent should be reduced to 0.08 percent for third-party application providers, a move it says would better align incentives, lower friction for merchants and help the broader ecosystem mature.
The recommendations come at a time when UPI has become the backbone of retail digital payments in India, powering everything from small-ticket purchases to larger consumer transactions across urban and semi-urban markets. For merchants, especially in sectors such as automotive retail, EV charging, mobility services and other high-volume, low-margin businesses, the economics of payment acceptance remain critical. Even small changes in transaction costs can shape whether businesses promote digital payments aggressively or absorb the expense reluctantly.
Repricing the UPI stack
The IIT-Bombay study takes direct aim at the current structure of payment economics, where the MDR has been kept low and in some cases effectively suppressed by policy choices intended to accelerate adoption. The professors behind the report contend that the present framework does not adequately reward the entities that build and maintain the consumer-facing layers of the UPI system, particularly third-party application providers. By proposing a 0.08 percent MDR for these providers, the report seeks to create a more sustainable commercial model without imposing a heavy burden on merchants.
The proposal is significant because it challenges the assumption that digital payments can scale indefinitely on near-zero economics. UPI has delivered extraordinary convenience and inclusion, but its long-term resilience depends on whether the companies that operate apps, manage customer support, invest in fraud controls and maintain user interfaces can recover costs. The report suggests that a healthier fee structure is necessary if the ecosystem is to continue expanding without degrading service quality.
Banks, deposits and incentives
A second major recommendation in the study is that banks should not depend on transaction fees as a primary source of income from UPI. Instead, the report says banks should use funds from their CASA deposits — current account and savings account balances — to support the payments infrastructure. In effect, the study argues that banks benefit indirectly from the broader relationship value created by digital payments and should not seek a disproportionate share of transaction-linked revenue.
This is a notable intervention in a policy area that has often been framed as a trade-off between consumer convenience and industry viability. The report appears to argue that banks, which already hold low-cost deposits and play a central role in settlement and compliance, should focus on service reliability and infrastructure support rather than extracting a bulk share of transaction economics. That position could resonate with policymakers who want to preserve UPI's low-cost appeal while avoiding a system in which a few institutions capture most of the value.
Trust must scale too
Beyond pricing, the study emphasizes that India's digital payments ecosystem still needs stronger supporting services if it is to deepen trust among users and merchants. That includes better reliability, improved dispute handling, stronger fraud prevention and more robust customer support. The report's broader message is that payment adoption is not sustained by low fees alone; it depends on confidence that transactions will work smoothly, reversals will be handled fairly and the system will remain secure under rising volumes.
For the mobility and automotive sectors, where digital payments are increasingly used in dealership transactions, service payments, subscriptions, charging networks and fleet operations, trust and uptime are especially important. A payment failure at the point of sale can disrupt a high-value transaction, while recurring service payments require predictable settlement and clear accountability. The study's emphasis on ecosystem services suggests that policy should look beyond headline adoption numbers and focus on the quality of the underlying rails.
The report is likely to add momentum to a wider policy conversation over how India should balance inclusion, affordability and sustainability in digital finance. UPI has been one of the country's most successful public digital infrastructure stories, but its next phase may require a more explicit commercial framework. The IIT-Bombay professors are effectively arguing that the system should move from subsidy-led expansion to a more durable model in which each participant is compensated in proportion to the value it creates.
If adopted, the proposed MDR cut would mark a meaningful recalibration of the UPI economy. It would preserve low-cost acceptance for merchants while giving third-party providers a clearer revenue path and pushing banks to support the system through balance-sheet strength rather than transaction tolls. For India's digital commerce ecosystem, the question is no longer whether UPI has won scale. It is how to finance the next stage of growth without undermining the trust that made that scale possible.