UPI MDR: 83% merchants unwilling to absorb 0.4% fee, says report

Only 17% of merchants are willing to absorb the 0.4% merchant discount rate (MDR) that will apply to UPI payments above Rs 2,000 from October 15, while 41% said they would not bear any MDR at all, as per a survey from LocalCircles. Overall, 83% of merchants surveyed are unwilling to absorb the notified charge, raising the possibility that the cost could be passed on to customers or push some payments towards cash and other modes.The report estimates that UPI transaction value could fall by 10% and transaction volumes by 4% after the 0.4% MDR comes into effect. The estimate is based on its surveys of consumers and merchants along with NPCI data, the organisation said in its latest report.The findings come just days before the new MDR framework is scheduled to take effect. The report says the impact will depend largely on who ultimately bears the cost and how consumers respond if merchants pass it on. MOST MERCHANTS UNWILLING TO ABSORB MDRLocalCircles surveyed more than 32,000 businesses and merchants across 242 districts to understand how much of the MDR they would be willing to bear.Only 17% said they would absorb a 0.4% MDR or more. As many as 41% said they would not bear any MDR charges, while another 9% said they do not accept UPI payments. Among those willing to bear some MDR, 15% said they would accept a maximum rate of 0.04%. Another 5% each were willing to bear up to 0.1%, 0.2% and 0.5%, while 8% said they could bear up to 0.25% and 12% up to 1%.At the notified rate of 0.4%, 83% of merchants surveyed would not be willing to absorb the charge, according to LocalCircles. The organisation said these merchants are likely to either pass on the cost to customers, recover it through pricing or steer customers towards cash, bank transfers or cards.76% USERS MAY MOVE AWAY FROM UPI FOR BIGGER PAYMENTSThe consumer response suggests the impact could be significant if the MDR reaches customers.LocalCircles received more than 67,000 responses from UPI users across 291 districts. When asked what they would do if a merchant charged an additional fee for UPI payments above Rs 2,000, only 14% said they would continue using UPI and bear the additional amount.Cash was the most preferred alternative, with 27% saying they would pay in cash. Another 26% said they would switch to a credit card, 14% to a debit card and 4% to bank transfer, NEFT or IMPS. A further 9% said they would ask the merchant for another payment option without an additional charge, while 2% said they would avoid or delay the purchase.The survey also looked at what consumers expect to do over time if UPI payments carry an additional cost.Among 37,654 respondents, 26% said they would use credit cards most often for purchases above Rs 2,000, while another 26% said they would use cash. Debit cards accounted for 13% and bank transfers, NEFT or IMPS for 11%.Only 20% said UPI would remain their most-used payment mode, while 4% were unsure. This means 76% of users surveyed expect to shift larger payments away from UPI if using it involves an additional cost.WHY THE IMPACT COULD BE BIGGER THAN THE TRANSACTION COUNT SUGGESTSThe MDR will apply to a relatively small portion of UPI transactions by volume, but these transactions account for a large share of the money flowing through the system.According to the report, person-to-merchant UPI payments above Rs 2,000 accounted for less than 5% of merchant transactions by volume, around 4% in August 2026. However, they represented about 67% of merchant payment value, or roughly Rs 6 lakh crore a month.That means the transactions affected by MDR carry a disproportionately large share of UPI's overall merchant payment value.UPI processed a record 24.51 billion transactions worth Rs 29.82 lakh crore in August 2026. Of this, 15.51 billion were merchant payments worth Rs 8.95 lakh crore. Payments above Rs 2,000 accounted for 67% of this merchant payment value, according to LocalCircles.The report estimates that UPI transaction value could decline by around 10% in the first full month after the 0.4% MDR goes live.The estimate takes into account the share of transactions to which MDR applies, the number of merchants likely to absorb the cost and consumer willingness to continue using UPI if the charge reaches them.The report estimates that UPI transaction volumes could fall by around 4%. It expects about 1 percentage point of the decline to come from the direct loss of UPI transactions above Rs 2,000 at MSME merchants.Another 3 percentage points could come from what LocalCircles describes as a “network effect”. The organisation expects some consumers who stop using UPI for high-value purchases at an MSME merchant to potentially stop using UPI with that merchant altogether.LocalCircles said the estimates assume that the MDR is passed on to some consumers. If merchants absorb more of the cost than expected, the impact could be different.WHAT IS CHANGING FROM OCTOBER 15?From October 15, a 0.4% MDR will apply to person-to-merchant UPI payments above Rs 2,000, ending more than six and a half years of zero MDR on UPI, according to the LocalCircles report.However, the new framework does not apply to all UPI payments. UPI payments of up to Rs 2,000 remain protected from charges, while person-to-person transfers remain free.Small merchants receiving up to Rs 1 lakh a month through UPI QR codes are also exempt. The government has said around 96% of merchant transactions will not be affected.The MDR is capped at Rs 300 per transaction for payments of Rs 75,000 and above. Essential sectors such as railways, telecom, insurance, fuel and farm inputs have a flat Rs 5 per transaction rate, while capital market payments attract 0.02%, according to the report.GOVERNMENT SAYS CUSTOMERS SHOULD NOT PAY MDRThe government has maintained that the MDR is not intended to be passed on to consumers.The Ministry of Finance has said MDR is “neither a tax nor a charge collected by Government or NPCI”. The charge is shared among banks, payment service providers and UPI apps to run and expand the payment network.Banks have been directed to ensure that merchants do not pass the charge on to customers, while UPI apps have been barred from imposing platform fees or hidden charges. Finance Minister Nirmala Sitharaman had also said that “the responsibility does not lie with the customer”, according to the report.However, LocalCircles pointed out that the framework does not yet spell out penalties or a refund mechanism for consumers who are wrongly charged.At 0.4%, a merchant would pay Rs 20 on a Rs 5,000 sale and Rs 200 on a Rs 50,000 transaction. An 18% GST is also levied on the MDR, although merchants can claim input tax credit, according to the report.TRADE BODIES WARN OF SHIFT TO CASHThe potential impact on merchants has already triggered resistance from trader bodies.The Confederation of All India Traders (CAIT) has warned that retailers could split bills, shift to bank transfers or reprice goods. The Retailers Association of India has also raised concerns that the MDR could undo some of the progress made by digital payments.In Bengaluru, traders have warned of a possible return to cash, while the Chamber of Trade and Industry has sought a rollback. CAIT had also sought a brief deferral of the rollout to allow for a nationwide awareness campaign.A CAIT-led delegation of around 20 trade leaders met Finance Minister Nirmala Sitharaman on September 30. The traders later withdrew a “No UPI Day” protest planned for October 2, but the 0.4% MDR remains scheduled to take effect on October 15.LocalCircles said its consumer survey received more than 67,000 responses from users across 291 districts, while its merchant survey received more than 32,000 responses from businesses across 242 districts.- Ends