MDR to help fintechs recover costs, boost their IPO hopes

MUMBAI: India’s payment industry has long been calling for higher subsidies or a controlled introduction of merchant discount rate (MDR) to recover transaction costs. The decision to allow MDR or higher value business payments will help to turn many business models sustainable and thereby increase competition in an industry that is currently a near duopoly of PhonePe and Google Pay.The introduction of a MDR will boost the prospect of companies awaiting IPOs such as PhonePe, Razorpay, PayU, PayNearby, and Innoviti. Fintechs are backing the move. Industry executives said that it will open up avenues for companies to get compensated for the operational and customer acquisition costs they have to bear for processing large volumes of transactions every day. Besides, if firms are able to make some money through UPI transactions, they can also innovate and bolster their systems at an individual level to check frauds, they said. “The ecosystem (fintech and banks) spends anywhere around Rs 10,000-12,000 crore every year to power UPI transactions. Of this, the govt gives only about Rs 2000 crore (by way of incentives). The rest gets lost,” said an executive with a fintech firm on condition of anonymity.

At present, UPI transactions are free for merchants. Walmart’s PhonePe and Google Pay hold the bulk of the market share.UPI processes nearly 23 billion payment transactions every month. For now, it is understood that the govt will introduce MDR only on large value transactions. In a note, Jefferies said that a 15-30 bps MDR on M (peer-to-merchant) transactions above Rs 2,000 can potentially generate Rs 5,000-10,000 crore in revenues for payment platforms. While such transactions made up only 4% of volumes in FY26, they accounted for 67% in value terms. “As the larger part of the incremental cost is incurred by merchant acquirers, they may retain a larger share,” analysts at Jefferies said.The fintech ecosystem has for long been calling for monetisation of UPI payments to enable sustainable growth of the industry. Also, there is a thinking that absence of MDR is leading to an oligopolistic situation with Google and Walmart dominating the market. But MDR on UPI is complex because govt has repeatedly assured that UPI will be free.Amrish Rau, CEO at Pine Labs said that the costs to fund expansion of UPI through continued investments in tech, IT, innovation and cyber-security have increased by almost 300% over the last 12-24 months. “While there should be some recovery of these investments, P transactions and charges to consumers-should continue to remain zero,” Rau said.