In the absence of an upfront payment surcharge where transactions under ₹2,000 co-exist with those above ₹2,000, a passthrough of the MDR fee would lead to an overall increase in the selling price for all, the study says | Photo Credit: AMIT DAVE

The choice for merchants due to the reintroduction of a commercial fee on large-value Unified Payments Interface (UPI) transactions (greater than ₹2,000) is either to bear the burden and take a hit on profit or pass it indirectly to the consumer through an increase in selling price, according to an IIT Bombay Technical Report.

In case the merchants increase their selling price to indirectly pass on the merchant discount rate (MDR) cost to consumers, it can lead to cross subsidisation of large ticket customers by small ticket ones, the report cautioned.

While acquirer banks have to ensure that merchants do not pass on MDR charges directly to customers under the new regime, it may not be easy for banks to ensure that, said the report’s authors, Ashish Das and Praggya Das. While Ashish is a Mathematics professor at the institute, Praggya is a former adviser-in-charge of the RBI’s Monetary Policy Department.

Bearing the burden

“Maybe, initially, the charges would be absorbed by merchants. But an increase in input costs – such as electricity, fuel, or any other cost – is ultimately passed on by businesses to their selling prices, so as to preserve their margins. Thus, it may not be correct to assume that the customers will not bear the burden of MDR directly or indirectly just because the merchants’ banks have been advised to ensure that merchants do not pass MDR charges onto customers,” the authors said in the report titled “UPI at a Crossroads Reintroducing the MDR: Impact Analysis and the Way Forward”.

With effect from October 15, a 0.4 per cent fee will be applicable on high-value merchant UPI payments, capped at ₹300 or ₹5 (for industry programmes).

The MDR revenue so generated will be distributed in such a manner among the UPI ecosystem that the issuer bank gets a maximum share of 40 per cent, followed by the acquirer bank (30 per cent), the application provider (20 per cent), and the payer payment service provider (10 per cent).

Instead of the acquirer bank, if the merchant is acquired by a payment aggregator (PA), the acquirer bank’s MDR share shall have a contribution towards the PA as per the business agreement between them

Either of the two

The authors mention two aftereffects if merchants increase their selling price to indirectly pass on the MDR cost to their consumers. First, their consumers who purchase goods/services for more than ₹2,000 will have to pay a higher price. Second, the higher selling prices percolate even to the consumers who make purchases of less than ₹2,000.

“Thus, in the absence of an upfront payment surcharge where transactions under ₹2,000 co-exist with those above ₹2,000, a passthrough of the MDR fee would lead to an overall increase in the selling price for all. An increase in selling price even for those who make small purchases of less than ₹2,000 results in cross-subsidisation of large ticket customers by small ticket ones,” they noted.

This is a consequence of the merchant’s increased business-cost for a portion of its business transactions.

RBI Governor Sanjay Malhotra recently said: “[UPI] is not free even now; someone is paying for it. The government is subsidising it, but somewhere the costs are being paid.”

To that, the authors said: “That ‘someone’ is the merchant who pays the MDR, but the ‘somewhere’ from where this MDR expenditure gets actually paid is the UPI using consumers who will have to take the burden of the P2M (Person to Merchant) UPI MDR.”

Published on October 11, 2026