UPI could generate Rs 22,000 crore annually by FY28 through merchant discount rate, Bernstein estimates

Mumbai: UPI could throw up a Rs 22,000-crore annual revenue pool by FY28 if a 40-basis-point MDR is imposed on half of the transaction value, Bernstein estimates, marking a significant monetisation opportunity for a payments ecosystem that has so far operated without merchant fees.

Bernstein estimates that banks could receive about Rs 14,000 crore of this pool, while payment apps could earn around Rs 7,000 crore, with the eventual economics depending on the regulatory allocation and commercial agreements between apps and their partner banks.

The estimates assume significance after the finance ministry on September 14 notified UPI transactions of up to Rs 2,000 and debit-card transactions routed through RuPay as payment modes on which banks and payment service providers cannot impose any charge, directly or indirectly. The notification effectively ring-fences smaller UPI transactions from charges while leaving transactions above Rs 2,000 outside the specified zero-charge category. It does not, by itself, impose MDR on higher-value transactions.

In August, the government had said consumers would continue to make UPI payments free of charge and that all person-to-person transactions would remain free. It had said that if MDR is introduced, it would apply only to a limited set of merchant transactions above a specified threshold and at a nominal rate, with the vast majority of merchant transactions continuing to remain free.

This creates a potential pathway for monetising higher-value merchant transactions, a segment that accounts for a disproportionately large share of UPI value. Bernstein estimates that transactions above Rs 2,000 constitute only about 4% of UPI transaction volumes but nearly 70% of transaction value, making them the most practical pool for monetisation without materially disrupting everyday payments.

“Based on debit card MDR benchmarks, RBI cost estimates, and comparable payment instruments, we believe an MDR of 30-40 bps is the most likely outcome,” said Pranav Gundlapalle, India head of financials at Bernstein, in the report.

Bernstein's Rs 22,000-crore estimate assumes a 40-bps levy on 50% of UPI transaction value by FY28. Under its illustrative distribution, issuing banks could receive around 30% of the economics and acquiring banks another 25%, while PSP banks would also receive a share. Merchant-side third-party application providers could get around 23%, consumer-side TPAPs about 8%, and the payment network around 5%. This would translate into roughly Rs 14,000 crore accruing to banks and around Rs 7,000 crore to payment apps.

The actual distribution could, however, differ materially. The regulatory framework would determine the MDR rate and the transactions on which it applies, while commercial agreements between payment apps and their partner PSP banks would determine how a part of the fee pool is ultimately shared.

“There is a credible case for retaining the current framework,” Gundlapalle said, pointing to the wider benefits of UPI, including lower cash-handling and ATM costs. “That said, the need for payment platforms to monetise their infrastructure investments, combined with recent policy discussions, has brought the MDR debate back into focus.”

UPI has rapidly become India’s dominant merchant-payment rail. It currently accounts for about 78% of person-to-merchant payment value compared with cards, while UPI merchant transaction value grew 27% year-on-year in the June quarter, Bernstein data showed.