A new study by professors at IIT-Bombay has reignited the debate over how India should fund its fast-expanding digital payments network, recommending a sharp reduction in the Merchant Discount Rate, or MDR, on UPI transactions and a rebalancing of who bears the cost of the system.
The report argues that the current MDR of 0.40 percent is too high for a platform that has become the backbone of everyday retail payments in India. It recommends cutting the rate to 0.08 percent for third-party application providers, a move that would significantly reduce the fee burden on merchants and, by extension, on the wider payments ecosystem. The study also says banks should not depend on transaction fees as a major source of income and should instead draw support from funds linked to CASA deposits, while building the services needed to strengthen trust in digital payments.
Fee Structure Reset
The recommendation lands at a sensitive moment for India's digital commerce and mobility sectors, where UPI has become central to everything from fuel payments and vehicle servicing to EV charging and app-based mobility transactions. For merchants operating on thin margins, even a small change in transaction costs can influence adoption, pricing and payment preferences. A lower MDR, if implemented, would ease pressure on businesses that have embraced UPI as a low-friction alternative to cards and cash.
The study's central argument is that the present structure places too much of the economic burden on the payments layer while the broader ecosystem benefits from scale. By reducing the MDR to 0.08 percent for third-party app providers, the report seeks to preserve incentives for innovation without allowing fees to become a drag on growth. The proposal effectively challenges the current assumption that transaction charges should remain a meaningful revenue stream in a system designed to promote mass digital adoption.
The report also appears to push back against any model in which banks capture a disproportionate share of the value generated by UPI transactions. Instead, it suggests that banks should not depend on transaction fees and should use CASA deposits as a funding base. In practical terms, that would shift the conversation from per-transaction monetisation to a broader banking relationship model, where low-cost deposits help support the infrastructure and service obligations tied to digital payments.
Trust And Infrastructure
Beyond pricing, the study places strong emphasis on service quality and ecosystem confidence. It says the necessary services must be developed to improve trust in digital payments, a point that reflects persistent concerns around failed transactions, dispute resolution, customer support and merchant settlement delays. As UPI volumes continue to rise, the reliability of the underlying rails has become as important as the convenience of the interface.
This is especially relevant for sectors such as automotive and mobility, where payments are increasingly embedded into digital workflows. EV charging stations, fleet operators, ride-hailing platforms and auto retailers all depend on seamless, low-cost transactions. If payment costs rise or service quality weakens, the friction is quickly passed on to consumers and businesses alike. A more efficient fee structure, the report suggests, would help sustain the momentum of digital acceptance in these high-frequency use cases.
The recommendation also comes against the backdrop of a broader policy question: who should pay for India's digital public infrastructure? UPI has delivered enormous scale and convenience, but the economics of maintaining and expanding the system remain contested. The IIT-Bombay study appears to argue that the public value created by UPI justifies a leaner fee model, especially if the objective is to keep the network inclusive and merchant-friendly.
For policymakers, the proposal will likely sharpen an already active debate over sustainability, incentives and fairness. For banks and payment intermediaries, it raises the prospect of a lower-fee regime that would require them to rethink revenue models and service delivery. For merchants, particularly in consumer-facing sectors, it offers the possibility of lower acceptance costs and wider digital adoption.
The study does not amount to policy change on its own, but it adds academic weight to calls for a more affordable UPI framework. As India pushes deeper into cashless payments across retail, transport and mobility, the question is no longer whether UPI should scale, but how the system should be financed without slowing adoption or undermining trust.