IIT-Bombay Report Urges Slashing Proposed UPI Fee to 0.08%, Excluding Banks
A new report from professors at IIT-Bombay argues the proposed 0.4% Merchant Discount Rate (MDR)—a fee paid by merchants for processing transactions—on certain UPI payments is too high and could undermine public trust. The report recommends slashing the rate to just 0.08% for person-to-merchant payments over ₹2,000. Crucially, it argues that banks should be entirely excluded from this revenue, suggesting they are already well-compensated by the massive, low-cost current and savings account (CASA) deposits that UPI helps them attract. Instead, the fee should primarily remunerate third-party application providers (TPAPs) like PhonePe and Google Pay, and the payment service provider banks.
What this means
This report throws a wrench into the plan to make the UPI ecosystem financially self-sustaining. Its core argument is that banks already profit handsomely from the interest-free funds in CASA accounts, an indirect subsidy powered by UPI's convenience. The authors believe this is enough compensation for the banks' role. If regulators adopt these recommendations, it would dramatically alter the revenue model, directing fees to non-bank players who bear significant costs without direct transaction income. For banks, this means losing a potential new fee stream they were likely anticipating. The debate now sharpens: is UPI a public utility that banks must support as a cost of doing business, or a commercial service that must pay its own way?
Most affected: Payments ecosystem revenue models
Key takeaway: Banks should re-evaluate expected revenue from UPI MDR and prepare for a scenario where fees are lower than proposed and primarily benefit non-bank payment apps.
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