Banks and payment apps may split the merchant discount rate (MDR) set to return on UPI, but the first to benefit could be the companies that build their payment systems.
Technology service providers (TSPs), which build UPI switches, card platforms and payment apps, are already seeing an influx of enquiries from banks and non-banking financial companies (NBFCs) looking to launch their own third-party application provider (TPAP) apps, the consumer-facing UPI apps such as PhonePe and Google Pay, according to multiple industry executives FE spoke to. The layer includes Mindgate Solutions, NPST, Sarvatra Technologies, Juspay, M2P Fintech, Zeta, iServeU and Finarkein Analytics.
MDR, the fee a merchant pays for accepting digital payments, has been zero on UPI since January 2020, when the government barred banks and payment firms from charging it. In effect, banks and apps have earned nothing from merchant payments on UPI for six years, beyond a government incentive for low-value payments at small merchants.
The government is now reportedly working on a structure under which it would be shared among banks, UPI apps and other players. It would apply only to larger merchants and higher-value payments, while person-to-person transfers stay free. Once they can earn from UPI, banks and apps are expected to turn more aggressive on it.
The fee is unlikely to be a blanket charge. Merchants could be classified by business category, much as GST treats essential and non-essential goods differently, the founder and CEO of a top UPI app told FE.
Either way, banks will need to establish which merchants qualify for which rate. That first layer of work is especially tricky for merchants who bank with several lenders, said Nikhil Kurhe, co-founder and CEO of Finarkein Analytics, a Pune-based TSP that builds data infrastructure for financial institutions. He expects merchants to bear the burden of proving they qualify for a lower MDR, much like lower-TDS certificates.
“Since our customers tend to be the larger regulated entities and we are not in the business of direct merchant acquisition, we will bill the regulated entities,” Kurhe said. Banks and acquirers would then decide whether to pass on the cost or absorb it.
Much of the demand is for apps. Devi Prasanna Pradhan, head of marketing at iServeU, a Bhubaneswar-based TSP that builds payments and card infrastructure for banks and NBFCs, said the company is getting a heavy influx of requests to build third-party application provider (TPAP) apps, consumer-facing UPI apps like PhonePe and Google Pay.
An NBFC’s borrowers pay EMIs through apps such as PhonePe today, but the lender could offer that on its own app. “Since there is no MDR, there is no way of making money,” Pradhan said. “But now, there are many players who want their TPAP apps, and we are getting a serious number of enquiries.” iServeU can build one within 30 days of signing, excluding NPCI certification, he added.
Siddharth Mehta, co-founder of Kiwi, a fintech offering credit on UPI, said MDR will boost investor confidence in the sector. “Till now, the investor perception was that you bring customers, you create engagement, and then you cross-sell,” he said. “Now at least the core economics will work.”
MDR is not entirely new to UPI, though. Merchants already pay it on RuPay credit card payments made through UPI, under a 2022 NPCI framework that exempts small offline merchants on payments of up to Rs 2,000. Credit lines on UPI have also carried an MDR since October 2024, with rates that vary by merchant category.