Fee Reset Push
A report by professors at IIT-Bombay has reignited the debate over how India should fund its fast-expanding digital payments rail, recommending a sharp reduction in the Merchant Discount Rate, or MDR, on UPI transactions. The study argues that the current 0.40% charge is too high for a system that has become the backbone of retail digital payments, and says the rate should be brought down to 0.08% for third-party application providers.
The recommendation is significant because UPI has been built on the promise of low-cost, near-frictionless payments for consumers and merchants. As transaction volumes have surged, questions have intensified over who should bear the cost of operating and scaling the infrastructure. The IIT-Bombay paper takes a clear position: the present fee structure does not adequately reflect the public utility character of UPI and risks placing too much of the burden on merchants and payment intermediaries.
Banks And CASA
The study goes further than a simple tariff revision. It argues that banks should not depend on transaction fees as a primary source of revenue from UPI activity. Instead, the report says banks should use funds from current account and savings account, or CASA, deposits to support the payments ecosystem. That suggestion points to a broader policy view that UPI should be treated less like a conventional commercial product and more like critical financial infrastructure.
In practical terms, the recommendation would shift the economics of digital payments. Banks, which already benefit from low-cost CASA funding, would be expected to absorb more of the operating cost of UPI services rather than passing it through transaction-linked charges. The report appears to be making the case that the wider gains from digital adoption — higher transaction volumes, deeper customer engagement and stronger financial inclusion — justify a different funding model.
The proposal also comes at a time when policymakers and industry participants are grappling with the sustainability of zero-cost or near-zero-cost digital payments. Merchants have long pushed back against charges that can erode margins, especially in small-ticket commerce. At the same time, payment firms and banks have argued that the infrastructure behind UPI is not costless and requires a viable revenue framework to remain resilient and innovative.
Trust And Infrastructure
Beyond pricing, the IIT-Bombay study stresses the need to develop essential services that can strengthen trust in digital payments. That includes the broader ecosystem of support functions that make UPI reliable for users and merchants alike, from operational stability to service quality and dispute handling. The report's emphasis suggests that transaction growth alone is not enough; the system must also be backed by dependable services that reduce friction and improve confidence.
This is especially relevant as UPI expands deeper into everyday commerce, including mobility, automotive services and EV-related payments, where speed and reliability matter. As digital payments move from simple peer-to-peer transfers into more complex merchant use cases, the quality of the underlying service layer becomes increasingly important. Any policy shift on MDR would therefore need to be matched by investment in infrastructure and customer protection.
The report's recommendations are likely to feed into a larger policy conversation over how India balances scale, affordability and sustainability in its payments architecture. A lower MDR could help merchants and accelerate adoption, but it would also require a clear framework for how banks and payment providers recover costs. The IIT-Bombay paper effectively argues that the answer lies in rethinking the revenue model rather than preserving the current fee structure.
For now, the study adds academic weight to a long-running policy question: how to preserve UPI's mass-market appeal without undermining the economics needed to keep the system secure, trusted and scalable. Its core message is unambiguous — if India wants digital payments to remain a public good, the cost burden must be redistributed more intelligently across the ecosystem.