New Delhi

The debate over introducing a merchant discount rate (MDR) on Unified Payments Interface (UPI) transactions should focus on who ultimately bears the cost, rather than whether payment companies need sustainable revenue models, industry experts said.

An MDR on UPI payments would be charged to merchants for processing digital transactions and is unlikely to be fully absorbed by banks or payment platforms. Instead, it would become an additional operating cost for businesses, potentially squeezing margins, limiting investment and reducing their ability to offer discounts to consumers.

While merchants may absorb the additional cost initially, experts said it could eventually lead to fewer promotional offers, higher prices or both, undermining broader policy efforts to lower the cost of doing business and support consumption.

The impact is expected to be most pronounced for small merchants, kirana stores and other businesses that have adopted digital payments in recent years. Even a modest MDR could discourage acceptance of UPI for low-value transactions, slowing the pace of digital adoption.

A decline in merchant acceptance could also ripple through the wider digital commerce ecosystem. Consumers accustomed to free and frictionless UPI payments may face fewer incentives to use digital payments if merchants begin discouraging UPI transactions or pass on higher costs.

Experts said the discussion extends beyond payments economics to the role of UPI as a national digital public infrastructure.

UPI has become one of India's most successful Digital Public Infrastructure initiatives, earning global recognition for enabling digital payments at population scale. It has reinforced India's position as a leader in digital payments and become a key element of the country's technology and economic narrative.

Introducing MDR, they argued, could weaken the simplicity and accessibility that have driven UPI's rapid adoption, making it essential for policymakers to weigh the potential impact on India's digital brand alongside commercial considerations.

Unlike private payment networks, public digital platforms such as Aadhaar, GSTN and DigiLocker are typically evaluated on the economy-wide value they generate rather than their ability to earn direct profits. Experts said a similar framework should guide discussions on UPI's long-term funding model.

They also noted that several large payment companies have expanded into lending, insurance, wealth management and other financial services, using payments as a customer acquisition channel. Policymakers should therefore assess whether merchant-funded MDR remains the most appropriate mechanism to support these platforms as they build diversified revenue streams.

The priority, experts said, should be to ensure banks, payment companies and other stakeholders have sufficient incentives to continue investing in the payments ecosystem without increasing the cost of doing business, weakening consumer demand or slowing digital adoption.

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Any decision on MDR should balance the long-term sustainability of the payments ecosystem with the broader economic and strategic value created by UPI, now a critical pillar of India's digital infrastructure and one of its most widely recognised technology success stories.