By Debiprasad Sarangi, CEO, iServeU
For most of a decade, UPI has been the most successful product Indian banks make no money from. Banks opened the accounts, kept the systems running, handled the disputes and absorbed the fraud losses, while every payment stayed free to the customer and the merchant. In August 2026 alone, UPI processed 24.51 billion transactions worth about ₹29.82 lakh crore. That is the biggest payments network in the country, and banks built it without a fee attached.
From October 15, 2026, they get one. The government has notified a 0.4% MDR on person-to-merchant UPI payments above ₹2,000, with a flat ₹300 fee on payments of ₹75,000 and above. Railways, telecom, insurance and fuel pay a flat ₹5, while person-to-person transfers and anything up to ₹2,000 stay free. Small merchants receiving up to ₹1 lakh a month through UPI are exempt. Merchants can’t add a surcharge to recover the fee from customers.
The fee touches few transactions but a lot of money. In August, payments above ₹2,000 were 67% of the value consumers paid to merchants and only 4% of the volume. Bernstein estimates a revenue pool of ₹27,000 crore by FY28 and a profit pool near ₹20,000 crore, with banks taking about 60% of it. It expects that profit pool to grow at around 20% a year for several years. So the starting number matters less than the direction.
Where the money goes
Take an eligible ₹10,000 payment. At 0.4%, the merchant pays ₹40, and that ₹40 is divided four ways. The issuing bank, which holds the customer’s account, gets 40%, or ₹16. The acquiring bank, which serves the merchant, gets 30%, or ₹12. The UPI app gets 20%, or ₹8, and the PSP bank behind the app gets the last 10%, or ₹4.
Three of the four slices go to banks. A bank’s share depends on the roles it plays and the volume it handles in each. Bernstein expects SBI to capture about 25% of the ₹8,000 crore issuer pool, and Citi estimates the MDR could lift Yes Bank’s profit before tax by 6% to 12% because of its PSP volumes. For most banks the near-term effect is small, in the range of 1-2% of profit before tax. The first year is where banks pick which of these roles to build up.
The opportunity is in the merchant
A bank that only issues accounts earns on the customer side. A bank that also acquires the merchant collects on both. If the customer’s account and the merchant’s account sit in the same bank, it earns ₹16 and ₹12 on the same ₹10,000, which is ₹28 of the ₹40. Add the PSP role and it is ₹32. Until now none of those combinations paid anything.
That makes merchant acquiring the place to invest. Take a bank that signs up 1 lakh merchants, each doing ₹3 lakh a month in eligible UPI payments. Each generates ₹1,200 a month in MDR, of which the acquirer’s 30% is ₹360. Across 1 lakh merchants, that is about ₹3.6 crore a month, or ₹43 crore a year, from acquiring alone, before any issuer income on the bank’s own customers. It is an illustration, not a forecast, and it grows with every merchant added.
The first thing this changes is the device. Banks have always subsidised QR stands, soundbox units and POS terminals and hoped to earn the money back through card MDR, float or cross-sales. UPI was the one payment mode that never helped. Now it does, so I expect banks to start offering all-in-one devices, covering UPI, cards and a soundbox, at very low cost or free, with this income as the reason. The bank that puts the device on the counter also becomes the merchant’s default bank for that payment flow.
What sits on top of the fee
The MDR itself may turn out to be the smaller part of the story. A merchant who takes payments through a bank’s device gives that bank a daily view of their sales, and that has value beyond the fee. I see three places it could lead, and these are my read, not something the sources say.
The first is the current account. A merchant whose payments already settle with the bank is a natural candidate for the main operating account, and the deposits that come with it. The second is credit. A steady, verifiable stream of sales is exactly what a working-capital loan needs, and a bank that sees the stream can price the risk better than one that doesn’t. The third is the customer side. Banks that issue accounts and cards will want more of their customers’ spending routed through instruments where they earn on both ends, including RuPay credit cards on UPI, which several large issuers have been rolling out.
Each of these turns a fee of a few rupees per payment into a relationship that lasts years. The banks best placed for this are the ones that already run merchant acquiring at scale or can build it quickly.
The limits
The maths works only for merchants who pay MDR. Anyone under ₹1 lakh a month is exempt, and those are the small merchants who most need a cheap device. On a flat ₹5 category like fuel, the acquirer’s cut would be ₹1.50 a payment, assuming the same split applies, which is thin. So “free” will probably come with conditions such as a volume commitment or a current account, and it will go to mid-sized merchants first.
The evidence will come from the first full quarter with MDR in it, October to December. Look at what management says about merchant additions, device deployment and fee income, and you will see which banks treated October 15 as a date to prepare for and which treated it as a surprise.