Daijiworld Media Network - Mumbai
Mumbai, Oct 12: An Indian Institute of Technology (IIT) Bombay report has recommended reducing the merchant discount rate (MDR) on Unified Payments Interface (UPI) transactions to 0.08 per cent from the proposed 0.40 per cent, arguing that banks should use a portion of their earnings from current and savings account deposits to fund the digital payments ecosystem.
The report, authored by Ashish Das, a professor in IIT-Bombay’s Department of Mathematics, and Pragya Das, a former Reserve Bank of India (RBI) official, proposes an alternative funding model for UPI that reduces the burden on merchants while ensuring the sustainability of the payment system.
The UPI Steering Committee fixed the MDR at 0.40 per cent for merchant transactions exceeding Rs 2,000 on September 15, with the framework scheduled to take effect from October 15, 2026. However, trade bodies have urged the government to withdraw the proposed charge.
Under the report’s suggested fee structure, third-party application providers (TPAPs), including PhonePe and Google Pay, would receive 0.06 per cent of the transaction value, while payment service providers (PSPs), largely banks, would receive 0.02 per cent. This differs from the 0.08 per cent share proposed for TPAPs by the National Payments Corporation of India (NPCI).
The authors argue that banks should forgo their share of MDR revenue because they already benefit substantially from the low interest rates paid on current account and savings account (CASA) deposits.
According to the report, banks earned more than Rs 4.85 lakh crore in net interest margin through CASA deposits in the 2025-26 financial year. It described this as disproportionately high compensation for providing basic banking services.
“Banks earn substantial interest margins from the CASA depositors. They should use the same towards running and improving the UPI ecosystem and not rely on MDR revenue sharing from offline transactions,” the report stated.
The study suggested that banks set aside approximately three per cent of the funds effectively contributed by CASA depositors through the low interest rates they receive. This would amount to around Rs 15,000 crore to support the operation and improvement of the UPI ecosystem.
The report also called on the RBI and the central government to make UPI a mandatory service for banks to continue operating, similar to the way core banking systems became essential to banking operations.
Questioning the proposed cap on electronic payment charges, the authors raised concerns over a Rs 300 transaction charge for electronic person-to-merchant payments of Rs 75,000 and above. They questioned whether such a high cap was reasonable, citing RBI regulations that require service charges to reflect the average cost of providing the service.
The report further recommended introducing a separate “digital payment fee” for online merchant transactions involving purchases of goods and services from e-commerce companies.
It also called for a reduction in credit card MDR, arguing that the existing fee structure could create an imbalance between different payment methods.
According to the authors, many merchants covered by the proposed UPI MDR framework already levy charges on transactions exceeding Rs 2,000 and accept credit cards. Lower credit card MDR, they argued, could help address concerns that credit card users are placing an unfair financial burden on customers making person-to-merchant payments through UPI.