MDR on UPI to Generate Rs 20000 Crore Profit With Banks Pocketing 60% Share
0.4% MDR on UPI payments above Rs 2,000 to boost bank profits
Mumbai: The government’s move to impose 40 basis points Merchant Discount Rate (MDR) on UPI payments above Rs 2000 could create a revenue pool of Rs 27000 crore by financial year 2028 and a profit pool of nearly Rs 20000 crore with banks accounting for 60 per cent of the pool or Rs 12000 crore, said a Bernstein report.
“Put differently, the industry could be earning an additional Kotak Bank-worth of profits every year and a profit pool that is likely to grow at around 20 per cent for next several years,” said Bernstein report authored by Pranav Gundlapalle, Ishan Mittal and Anirudh Gupta.
The government this week notified MDR charges that would come into effect from October 15, 2026. According to the notification, a MDR of 0.4 per cent will be introduced on Person-to-Merchant (P2M) UPI transactions above Rs 2,000, while high-value purchases of Rs 75,000 and above will attract an MDR fee of Rs 300 per transaction.
For specific merchant categories such as railways, telecom services, insurance, and fuel, among others, a flat MDR of Rs 5 per transaction shall be applicable for transactions above Rs 2,000. However, small-value UPI transactions up to Rs 2,000 and person-to-person transactions (P2P) will continue to remain free of cost.
The fee is expected to cover most UPI merchant payments by value.
Transactions above Rs 2,000 represented 67 per cent of the money consumers paid to merchants in August, although they accounted for only 4 per cent of the total transaction volume, according to data from the National Payments Corporation of India.
The fee could boost banking-system incremental profits by about 3 per cent, though the benefits are likely to be “highly uneven,” Bernstein said.
A bank's share of the MDR pool depends on its position across three roles: issuer bank, payer PSP bank (the partner bank for the consumer-facing app), and beneficiary PSP bank (the partner bank for the merchant-facing app). On the Issuer side, banks with strongest saving account franchises remain the largest beneficiary of MDR on UPI with SBI likely to capture 25 per cent of the Rs 8000 crore issuer pool. On the PSP side however, the landscape is far more concentrated, with Yes Bank and Axis Bank emerging as key beneficiaries.
According to Citi, the new MDR framework will create a revenue pool of Rs 16,000–20,000 crore across the payments ecosystem. “Cumulatively, we estimate 45-50 per cent of the run-rate P2M transactions by value may be eligible for 40 bps MDR, which at latest month’s annualised run-rate of Rs 110 lakh crore in P2M transactions, implies a revenue pool of up to Rs 20,000 crore.”
