The Rs 11,500 crore UPI pivot: How proposed MDR fees could power Paytm’s growth? BofA reaffirms Buy

The government has created legal flexibility to introduce a Merchant Discount Rate (MDR) on selected UPI merchant transactions. The final rules are still awaited. 

According to Bank of America (BofA) Global Research, the move could create an annual revenue opportunity of around Rs 8,000-11,500 crore for the broader payments industry.

And Paytm could be among the biggest beneficiaries.

MDR on UPI transaction: What exactly is changing?

UPI has remained free for consumers and most merchants since its launch. But running the network is not free. Banks, payment processors and fintech companies bear costs related to technology, fraud monitoring, cybersecurity, settlement and customer support.

The government currently provides a subsidy for UPI payments. However, the proposed MDR could allow part of these costs to be recovered from larger merchants.

According to the brokerage report, “Media articles indicate that 1) MDR may apply only to larger merchants and transactions above Rs 2,000; 2) MDR may be anywhere between 25-40 bps; 3) The government retains subsidy for low-value payments & 4) Implementation is staggered, with exemptions for sensitive categories.”

Bank of America noted that “UPI transactions are expected to remain free for consumers & smaller merchants.”

That distinction could be important. It means the proposed system may not affect everyday UPI payments at small shops.

How big could the opportunity be?

The numbers get interesting here. Bank of America (BofA) estimates that around 30-35% of total UPI transaction value could come from person-to-merchant payments. 

After accounting for larger merchants and transactions above Rs 2,000, the brokerage estimates an annual transaction pool of around Rs 45 lakh crore.

At a 25-basis-point MDR, that could generate roughly Rs 11,300 crore in annual revenue.

According to the BofA report, “The theoretical size of the revenue opportunity comes to Rs 81-113 billion.”

But who gets the money?

Banks, payment apps could all benefit

The MDR pool is likely to be shared across several participants, including issuing banks, acquiring banks, Payment Service Provider (PSP) banks, payment gateways, merchant acquirers and potentially the National Payments Corporation of India (NPCI).

Issuing banks could get the largest share. Payment apps could also benefit because of their presence across consumers and merchants.

According to BofA, “Paytm the key beneficiary from UPI” within its coverage universe.

That is because Paytm has a significant presence in merchant payments. PhonePe, meanwhile, remains the largest player on the consumer UPI side, with around 49% market share, according to the brokerage.

What could MDR mean for Paytm?

BofA’s calculations suggest the impact could be meaningful. If a 25-basis-point MDR is introduced and Paytm gains around 2-3 basis points in incremental net profit margin, the brokerage estimates an 18-24% potential upside to its financial year 2028-2030 earnings per share estimates.

It also sees around 20% upside to Paytm’s fair value.

The brokerage has therefore raised its price objective to Rs 1,775 from Rs 1,560 and reaffirmed its ‘Buy’ rating.

But there is a catch.

Has the stock already priced it in?

Paytm shares have already risen 18% since the MDR-related news flow emerged, compared with a 2% rise in the Nifty.

BofA believes “a large part of this upside is mainly captured.”

So, MDR may be a potential earnings catalyst, but investors may need more clarity on the final rate, eligibility and revenue-sharing structure.

Competition is another risk. Once UPI becomes monetisable, banks and other financial companies could become more aggressive in acquiring both consumers and merchants.

What could drive Paytm beyond MDR?

Bank of America continues to see other potential catalysts.

These include a possible wallet licence and the implementation of UPI market-share caps. If NPCI introduces a 30% market-share cap by December 2026, Paytm could potentially gain from changes in UPI market shares.

For now, though, the MDR proposal remains the key trigger.

The key question is no longer whether UPI can create a revenue pool. It is how much of that pool Paytm can actually capture.

Disclaimer: This article is based on research reports from one or more brokerage firms and is for informational purposes only. The views, target prices, and recommendations expressed are those of the respective brokerage firms and do not reflect the official policy or position of Financial Express. This should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor before making any investment decisions.