Bengaluru: India's move to levy merchant discount rates (MDR) on select UPI transactions is set to bring new costs for some businesses, even as most merchant payments remain free. A new survey suggests the impact will vary widely, with some merchants anticipating substantial monthly bills while many expect the charges to have little effect on their margins.
A merchant survey included in How Urban India Pays 2026, a report by Pahlé India Foundation in partnership with Amazon Pay, found that 25% of respondents expect to pay more than ₹5,000 a month. Another 58% of the merchants expect to pay ₹1,000 or less, including 13% who expect no charge, suggesting the cost could fall unevenly across businesses. More than 95% of UPI payments to merchants will remain free under the new merchant discount rate.
Last month, the National Payments Corporation of India (NPCI), which operates the unified payments interface (UPI), announced a merchant discount rate on select person-to-merchant UPI transactions, effective 15 October, while keeping person-to-person transactions free.
Quick answers to key questions
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QUESTIONS
MDR is a fee merchants pay to banks and payment companies to process digital payments. The proposed standard rate is 0.4% on select person-to-merchant UPI payments above ₹2,000, capped at ₹300 per transaction; person-to-person payments remain free.
NPCI deferred the rollout until immediately after Diwali. It has not announced the revised implementation date yet.
Eligible small merchants using the specified UPI QR arrangement remain exempt, including on payments above ₹2,000. The exemption applies to merchants within the monthly UPI-receipts threshold; they enter the fee-paying category after exceeding it for three consecutive months.
A charge imposed specifically because a customer chooses UPI is treated as a surcharge, even if it is called a convenience fee. The related article says NPCI rules prohibit passing the MDR on to customers; a genuine service fee must apply consistently across payment methods.
In a survey of 1,054 merchants, 25% expected monthly charges above ₹5,000, while 58% expected to pay ₹1,000 or less, including 13% who expected no charge. These are estimated costs, not actual bills.
On Tuesday, however, the NPCI deferred the levy until immediately after Diwali. The revised implementation date will be announced separately. Diwali falls on 8 November this year.
MDR is the fee merchants pay banks and payment companies to process digital payments. Under the framework, specified UPI merchant payments above ₹2,000 will attract a 0.4% charge, capped at ₹300 per transaction, subject to exemptions and sector-specific concessions.
Expected costs captured
The merchant survey captures expected costs rather than actual bills. The report’s merchant survey covered 1,054 kirana owners and other merchants.
Amazon Pay India chief executive Vikas Bansal said in an interview with Mint that merchant payment services could expand beyond basic QR-code acceptance as the industry prepares for the introduction of MDR.
“Merchant acqusition business will continue to be an opportunity for us…We expect merchant offerings to move from basic payments to more value-added services in the future,” Bansal said.
He identified card acceptance, buy-now-pay-later options, rewards and loyalty programmes as avenues for payment providers to deepen engagement with offline merchants.
Businesses expecting monthly MDR bills above ₹5,000 typically handle higher-value sales, the report said. Some merchants surveyed suggested raising the transaction threshold for the fee from ₹2,000 to around ₹5,000, which would keep more of their payments free. Others proposed a slab-based structure, with charges varying by transaction value rather than a single standard rate.
Still, 48% of respondents described the expected cost as insignificant or only slightly significant. The same merchants expected no or only a slight effect on their margins.
About 35% reported monthly UPI receipts of ₹1 lakh or less, the turnover band relevant to the small-merchant exemption. Eligible small merchants receiving payments through the specified UPI quick response (QR) arrangement remain exempt, including on payments above ₹2,000. They move into the fee-paying category after exceeding the monthly threshold for three consecutive months.
Clearer communication can help
Clearer communication of the exemption and of zero MDR on payments up to ₹2,000 would help smaller merchants understand their liability, the report said. Being above the monthly turnover threshold does not mean every transaction attracts a fee.
For 44% of respondents, payments above ₹2,000 account for a quarter or less of their UPI transactions. As a result, most of their payments would remain free, broadly consistent with NPCI's transaction-volume data, the report said.
UPI is already central to these businesses. More than half, or 53%, receive over half their sales through it, including 35% who receive 51–75% and 18% who receive more than three-quarters. Only 3% receive less than a tenth of their sales through UPI.
Another 53% expect customers to continue paying as they do now or switch to other digital modes. However, only 43% said they would continue accepting UPI as usual.
The respondents span kirana and general retail stores (36%), services (18%), wholesale (13%), other retailers such as electronics, fashion and pharmacies (13%), restaurants (5%), fuel retailers (5%) and other businesses (10%). Three in four receive between ₹50,000 and ₹10 lakh a month through UPI.
Quicker access to money
Beyond acceptance, merchants want quicker access to their money. Around 72.1% of surveyed merchants expressed hesitancy about digital payments, citing settlement delays. The report recommended pairing MDR with faster settlement and working-capital credit based on UPI transaction histories and business analytics.
“For us to grow as an ecosystem, we have to grow both sides,” Bansal said, referring to consumers and merchants. He also pointed to other industry players developing AI-led inventory and workflow-management tools for businesses.
The consumer findings show a similar need to move beyond basic payments. Across five credit products, including credit cards, buy now, pay later (BNPL) and no-cost instalments, average awareness was 88%, but average usage was 31%. Nearly two-thirds of respondents had never applied for digital credit through an app. Among those who applied, 24% abandoned the process midway.
Bansal said consumers had grown accustomed to trusting payment apps but had not developed the same confidence in borrowing through them.
“The trust that digital apps have earned in payments must also be earned in financial services,” he said.
In tier-2 cities, 60% of respondents had used BNPL at least once. In tier-1 cities, 42% knew about it but had never used it. Among salaried respondents, 66.5% of women had used BNPL or EMIs, compared with 59.3% of men.