UPI Merchant Payments Could Hold Rs 30,000 Crore MDR Revenue Potential

CareEdge estimates that a targeted 0.25%–0.50% MDR on select high-value merchant transactions could generate Rs 15,000–30,000 crore.

India’s Digital Payments Ecosystem Continues to Expand

India’s payments ecosystem has undergone a significant shift from a cash-led system towards digital payments. Digital modes accounted for 99.8% of total transaction volume and 97.9% of transaction value in Q1FY27, supported by policy measures, interoperable infrastructure led by UPI, fintech adoption, financial inclusion and increasing merchant digitisation.

The growing depth of the digital payments ecosystem is also reflected in the rising importance of person-to-merchant (P2M) transactions. P2M payments accounted for 29% of UPI transaction value in Q1FY27.

As UPI continues to scale, attention is increasingly turning towards the long-term financial sustainability of the ecosystem. CareEdge estimates that a targeted Merchant Discount Rate (MDR) of 0.25%–0.50% on select higher-value merchant transactions could create a potential gross revenue opportunity of Rs 15,000–30,000 crore.

UPI Strengthens Its Position in Retail Payments

India’s retail payments ecosystem combines traditional instruments such as cheques and cards with digital payment platforms including UPI, IMPS, ABPS and PPIs.

UPI has emerged as the core payment rail for retail transactions. Its share of retail payment volumes increased from 73.6% in FY23 to 86.8% in Q1FY27, while other payment modes have become comparatively smaller.

The increasing adoption of UPI has been supported by widespread QR acceptance, real-time transactions, a low-cost structure and its suitability for everyday payments.

Government and RBI initiatives are also supporting digital payment adoption, particularly in Tier-II and Tier-III cities. The Payments Infrastructure Development Fund (PIDF), for instance, aims to expand digital payment infrastructure in underserved regions.

UPI Value Share Continues to Rise

UPI and BHIM have steadily increased their share of retail payment value. At the same time, NEFT and IMPS continue to account for a significant share, although their contribution has gradually declined compared with FY23.

The shift indicates continued movement towards a UPI-led retail payments architecture, with further scope for UPI to expand its share.

Targeted MDR Could Support Ecosystem Sustainability

As transaction volumes continue to rise, the focus is shifting towards creating a sustainable financial model for the UPI ecosystem.

According to the analysis, any future MDR framework is expected to be nominal and applicable only to a limited set of merchant transactions. Consumers would continue to have access to everyday UPI payments without charges, while P2P transactions would remain free.

The transaction mix provides scope for targeted monetisation without applying charges broadly across the ecosystem.

P2M transactions accounted for 29% of total UPI transaction value, while 67.2% of P2M value consisted of transactions above Rs 2,000. This means that approximately 19.5% of overall UPI transaction value potentially falls within the higher-value merchant segment that could be considered for an MDR framework.

Rs 15,000–30,000 Crore Revenue Opportunity

Based on a FY26 UPI transaction-value pool of Rs 61.13 lakh crore, an MDR of 0.25%–0.50% on the potentially addressable transactions could generate approximately Rs 15,000–30,000 crore in gross revenue.

CareEdge estimates that every 10 basis points (bps) of MDR could generate approximately Rs 6,113 crore.

The actual revenue potential would depend on the final eligibility criteria, transaction thresholds and MDR rate. The analysis, however, indicates that targeted monetisation of higher-value P2M transactions could provide a revenue mechanism while preserving free P2P and low-value digital payments.

High-Value Merchant Payments Are Increasing

The share of P2M UPI transactions above Rs 2,000 has increased steadily, rising from 15.1% in FY23 to 20.1% in Q1FY27.

The trend reflects a gradual shift towards higher-value merchant payments through UPI. This expands the potential pool of transactions that could be subject to MDR, although additional payment charges could increase sensitivity among merchants.

Proposed Framework Could Reduce Reliance on Subsidies

The proposed amendment to the Payment and Settlement Systems Act is positioned as an enabling measure for developing a more self-sustaining revenue framework.

The objective is to encourage greater participation and competition among ecosystem participants while reducing dependence on subsidies as UPI transaction volumes increase.

The government has reiterated that UPI transactions for consumers and P2P payments will remain free. Any future MDR is expected to be nominal and limited to selected transactions above specified thresholds.

The sustainability framework could also support UPI’s expansion across rural and semi-urban markets while strengthening its position as an affordable, secure and globally scalable digital payments platform.

Impact Across the UPI Ecosystem

A targeted MDR framework could have implications for several participants, including banks, payment service providers (PSPs), third-party application providers (TPAPs) and merchants.

Consumers are expected to continue using UPI and P2P payments without charges. For banks, PSPs and TPAPs, a sustainable revenue mechanism could help support the growing costs associated with payment infrastructure, cybersecurity and fraud prevention.

High-value merchants, meanwhile, could face additional payment costs and may seek to pass these costs on to customers. This could potentially influence consumer preferences between UPI and alternative payment methods.

Payment platforms could also explore other monetisation avenues, including convenience and platform fees, cross-border and foreign-exchange charges, targeted offers and loyalty programmes.

UPI Reaches Record Scale

UPI has reached substantial scale, with 741 banks live on the platform and monthly transaction volumes exceeding 22 billion transactions.

In July 2026, UPI processed approximately Rs 29.87 lakh crore in transaction value.

“With 741 banks live on UPI and monthly volumes exceeding 22 billion transactions, amounting to approx. Rs 29.87 lakh crore in July 2026, India’s UPI ecosystem has achieved remarkable scale and depth. This strong growth reflects increasing adoption, expanding reach and the robustness of India’s digital payments infrastructure, positioning UPI for continued expansion and deeper integration across use cases,” says Kalpesh Mantri, Assistant Director at CareEdge Advisory.

Sustainability Becomes a Key Priority

As UPI processes increasingly large transaction volumes, the financial sustainability of the underlying payment infrastructure is becoming an important consideration alongside continued transaction growth.

P2P transactions account for 71% of UPI transaction value, while P2M transactions account for 29%. Within P2M, transactions above Rs 2,000 represent 67.2% of transaction value.

“With UPI processing nearly 2,400 crore transactions in a single month, the ecosystem has reached a scale where sustainability of the underlying payment infrastructure is becoming as important as transaction growth. A targeted MDR framework could unlock a potential revenue pool of Rs 15,000-30,000 crore at MDR rates of 0.25%-0.50%, highlighting the significant monetisation potential of higher-value merchant transactions. The key question is how this revenue is ultimately distributed across the ecosystem and whether merchants will be willing to absorb the associated cost,” says Tanvi Shah, Senior Director at CareEdge Advisory.

Outlook for India’s Payments Ecosystem

UPI’s growth reflects the increasing maturity of India’s digital public infrastructure. Rising internet tele-density, greater financial inclusion, merchant digitisation and regulatory support are expected to support continued expansion.

India’s payments landscape is also moving towards a hybrid model in which digital and cash-based channels coexist and serve different but complementary purposes.

The RBI Payments Vision 2028 provides a roadmap focused on resilience, inclusion, security and innovation. Its priorities include improving cross-border payment efficiency and interoperability, strengthening customer protection, streamlining regulations, introducing the Payments Switching Service and supporting smaller payment providers.

Continued investment in cybersecurity, research capacity, data accessibility and innovation in areas such as cards and electronic cheques will remain important for improving scalability and resilience across India’s payments ecosystem.