Bernstein UPI MDR: India's payments ecosystem could be staring at a potentially major new revenue pool if the government moves towards a revised Merchant Discount Rate framework, with Bernstein estimating that a 40-basis-point MDR could create a Rs 22,000 crore revenue pool by FY28E.
Bernstein's analysis assumes that 50% of UPI transaction value would be eligible under such a framework.
The brokerage estimates that banks could collectively capture around Rs 14,000 crore, while third-party payment application providers, or TPAPs, could earn about Rs 7,000 crore.
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The analysis comes as the government has recently clarified that banks and payment system providers cannot impose direct or indirect charges on UPI transactions of up to Rs 2,000, while the protection also covers payments made through RuPay-powered debit cards.
A Rs 22,000 Crore Pool — But Who Gets The Economics?
Bernstein's estimates suggest that the economics of a potential MDR framework could be spread across several participants in the payments chain.
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On the banking side, issuing banks could receive 30% of the economics, while acquiring banks could receive 25%. PSP banks could receive 5% each.
Among TPAPs, the brokerage estimates that merchant-side TPAPs could receive 23%, consumer-side TPAPs 8%, while the payment network could receive 5%.
The resulting distribution highlights how a seemingly small MDR rate could translate into a sizeable revenue opportunity once applied across a large eligible transaction base.
What Could The New MDR Framework Look Like?
Bernstein expects the regulatory framework to determine the headline MDR rate as well as the conditions governing which transactions are eligible.
However, the precise commercial split between TPAPs and their partner PSP banks is likely to remain subject to commercial negotiation, according to the brokerage.
That makes the final design of the framework critical for determining where the economics ultimately accrue.
Zero MDR Framework Could Be Reworked
The government's recent clarification comes amid changes to the legal framework governing digital payments.
Earlier, the Centre was expected to propose amendments to the Payment and Settlement Systems Act and Income Tax Act that could replace the existing statutory zero-MDR framework with a notification-based mechanism.
Under the proposed approach, the government could notify which digital payment modes would continue to enjoy MDR exemption. This would potentially allow MDR to be levied on payment modes not specifically notified for exemption.
However, the changes themselves would not automatically impose MDR on UPI or any other payment instrument.
For now, the government has maintained that consumers will not have to pay transaction charges for using UPI.
The bigger question, therefore, is not whether consumers will suddenly pay for UPI — but whether a new MDR framework can turn the enormous UPI ecosystem into a Rs 22,000 crore revenue pool, and how that money gets divided across banks, TPAPs and payment networks.
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