India’s decision to introduce a 0.4% merchant discount rate (MDR) on certain high-value UPI transactions could create a significant new revenue stream for digital payments companies, with PhonePe and Google Pay potentially accounting for about $900 million annually by 2028, according to estimates cited by Reuters.
The new fee will apply from October 15 to UPI payments made to merchants when the transaction value exceeds ₹2,000. Person-to-person transfers will remain free. The move marks a shift for UPI, which has operated without such merchant charges for more than six years.
PhonePe, Google Pay poised to gain
PhonePe and Google Pay together accounted for around 80% of UPI payment values last month, according to Reuters. Brokerage Bernstein estimates that the new MDR regime could generate as much as $1.1 billion in annual revenue for payment apps by March 2028. Based on their current market share, the two dominant platforms could receive roughly $900 million of that amount.
The additional revenue could give the two companies greater scope to expand their payment businesses, particularly in rural and smaller markets, where relatively low transaction values have previously made expansion less commercially attractive.
Industry sources cited by Reuters said transaction data generated through wider rural penetration could also help payment companies develop additional financial services, including lending and other products.
UPI moves beyond its free-payment model
The introduction of MDR represents a significant change to India's digital payments ecosystem. UPI processed about 24.5 billion transactions worth ₹29.82 trillion in August, according to official data cited in Reuters reports.
The new framework brings UPI closer to other international digital payment systems where merchant fees are charged for transactions. However, the government has specified that the MDR is a charge on merchants and cannot be directly passed on to consumers.
The change has nevertheless raised concerns among some retailers and industry participants about whether merchants could indirectly pass on the additional cost or encourage greater use of cash. Reuters reported that several retailers and analysts expect the impact on UPI adoption to remain limited because consumers have become deeply accustomed to digital payments.
Smaller players face a changing market
The new revenue model could also reshape competition among UPI applications. Smaller payment companies are expected to focus more heavily on higher-value transactions, utility payments, ticketing, business payments and credit-linked services, Reuters reported.
The development could also revive questions about concentration in India's UPI market. The National Payments Corporation of India (NPCI) has twice deferred a decision on a proposed 30% market-share cap for individual third-party payment providers.
For merchants, the new MDR will represent the first significant transaction-based cost on qualifying UPI payments since the system's rapid expansion. For payment companies, it creates a new source of revenue in an ecosystem that has processed billions of transactions while relying largely on other forms of financing and incentives.
