The Real Cost Of UPI, Missing Revenue Model and A Case For Bringing Back MDR

The Unified Payments Interface (UPI) has revolutionized India’s digital payments landscape, enabling seamless, real-time transactions for millions of users and merchants. However, recent outages and a shrinking government subsidy have reignited debate over the platform’s long-term sustainability, especially in the absence of a clear revenue model.

UPI’s meteoric rise can be traced to the government’s decision in 2019 to eliminate the Merchant Discount Rate (MDR) for UPI transactions. MDR, a small commission traditionally paid by merchants and shared among banks and payment service providers, was seen as a barrier to digital adoption—particularly among small retailers. The zero-MDR regime fueled explosive growth: UPI transactions have multiplied fifteenfold in five years, now dwarfing credit card usage nationwide.

But this success comes at a cost. Banks and payment companies still incur expenses for every UPI transaction—ranging from technology infrastructure to regulatory compliance—without earning any direct revenue. To offset these losses, the government introduced a subsidy, currently set at 15 basis points for transactions below ₹2,000. Yet, with UPI’s popularity surging, the allocated subsidy has failed to keep pace with actual operational costs. Industry estimates suggest the true cost of running UPI far exceeds the government’s reimbursement, leaving service providers to absorb the shortfall.

This funding gap has prompted calls from banks, payment companies, and industry bodies to either raise subsidies or reintroduce MDR. Advocates argue that a sustainable revenue model is essential to maintain and upgrade the digital payments infrastructure, foster competition, and support innovation. Without it, smaller players may struggle to survive, and the risk of service disruptions could increase.

As policymakers weigh their options, the case for bringing back MDR—or finding an alternative revenue mechanism—has never been stronger. The future of India’s digital payments ecosystem may depend on striking the right balance between accessibility, affordability, and financial viability.