Editorial – SEP 2026
The 0.4 per cent MDR regime for UPI is difficult to justify. We looked at varied evidences for this edition’s cover story. A levy of this magnitude, imposed on merchant transactions above Rs 2,000, should ordinarily follow a transparent assessment of the ecosystem’s actual costs, infrastructure requirements and funding needs. Instead, the numbers suggest that the government has created a Rs 25,908-crore annual revenue pool without first establishing why the UPI ecosystem requires anything close to this amount or why such a large share should accrue to dominant payment apps.
Based on August 2026 UPI data, our analysis shows that eligible transactions could generate about Rs 2,159 crore a month, or Rs 25,908 crore annually, after accounting for concessional rates and transaction caps. On the proposed 60:40 distribution, banks would receive Rs 15,549 crore while payment apps would receive Rs 10,359 crore.
PhonePe and Google Pay together command 82 per cent of the value of UPI merchant transactions above Rs 2,000. They could therefore capture an estimated Rs 8,494 crore of the annual MDR pool — Rs 4,972 crore for PhonePe and Rs 3,522 crore for Google Pay. In effect, a government-created revenue stream will substantially strengthen the two companies that already dominate UPI.
The implication is sharper when the infrastructure requirement is examined. NPCI, the central networking hub of UPI, spent Rs 1,822 crore on equipment, services, bandwidth and other purchases over four years—an average of about Rs 455 crore annually. Its FY25 asset base was Rs 909 crore. NPCI itself reported a Rs 1,877-crore surplus on Rs 3,836 crore revenue in FY25, besides substantial financial resources, including Rs 17,892 crore in settlement guarantee funds and Rs 13,667 crore in credit lines.
Banks, meanwhile, already possessed IT networks for their existing customers and needed primarily incremental capacity for UPI connectivity and traffic. Where, then, is the economic basis for creating a Rs 25,908-crore annual kitty?
The regulatory process also raises serious questions. The ten meetings of the UPI and Services Steering Committee examined for our cover story contain no documented demand for MDR or any recorded expression of financial distress by banks over UPI networking costs. The committee was not involved in determining the 0.4 per cent rate. The Finance Ministry decided the levy; the distribution mechanism followed. The result is a policy monetizing public digital infrastructure to reward dominant private intermediaries.
