PhonePe CEO backs 0.4% UPI MDR, says industry needs sustainable revenue model

PhonePe Chief Executive Sameer Nigam has openly backed the government’s decision to impose a 0.4% Merchant Discount Rate (MDR) on specified person-to-merchant UPI transactions above Rs 2,000, calling it a necessary step toward building a sustainable revenue model for India’s digital payments industry.

The National Payments Corporation of India (NPCI) notified the new MDR framework earlier this month, with effect from October 15. The levy applies only to P2M transactions above the threshold; person-to-peer transfers, small-value vendor payments up to Rs 2,000, and transactions by merchants receiving less than Rs 1 lakh per month remain free.

In interviews with India Today and CNN-News18, Nigam rejected arguments that zero MDR was the primary reason for UPI’s success. He pointed out that UPI already carried a 0.65% MDR between 2016 and 2020, and that the most popular use case — peer-to-peer money transfer — has always been free of MDR and will continue to be exempt.

“Why should UPI be free to merchants?” Nigam asked, according to CNN-News18. He argued that other payment instruments such as RTGS, credit cards, and wallets attract charges, and that the industry faces rising costs for cybersecurity, fraud prevention, KYC compliance, and AI-related threats.

Nigam said the industry spends Rs 10,000-12,000 crore annually at current UPI volumes, while government compensation has fallen far short of covering that cost. The government paid Rs 3,900 crore in FY24 and the figure crossed Rs 7,800 crore by FY25-26, he said. Fully compensating banks and fintech companies would require Rs 10,000-14,000 crore, making the subsidy model unsustainable.

“We don’t want subsidies from the government,” Nigam told India Today. “We are all bleeding money.” He noted that the industry has invested nearly $5 billion in equity over the past five to six years, yet fintech firms and banks continue to report losses on their UPI businesses.

**Most transactions untouched, but high-value volume significant**

Nigam said 95-96% of P2M UPI transactions by volume fall below the Rs 2,000 threshold, meaning everyday payments for groceries, auto-rickshaw fares and public transport will not be affected. However, the roughly 4% of transactions above Rs 2,000 account for about 66% of total UPI transaction value, according to Nigam.

He also stressed that charging customers a surcharge specifically for UPI payments is illegal under the relevant notification and NPCI circular. The responsibility for ensuring merchants do not pass on the cost falls on acquiring banks and payment aggregators.

**MDR revenue distribution and sectoral caps**

Nigam outlined how MDR revenue will be distributed across the ecosystem. The issuing bank will receive 40%, the PSP bank 10%, and the third-party application provider (such as PhonePe and Google Pay) will receive 20%. An additional 5% of the relevant revenue will be withheld to support small merchants, under NPCI provisions.

He highlighted that sector-specific caps limit the burden on thin-margin businesses. Petrol, insurance and agricultural transactions have a maximum charge of Rs 5 per transaction. Broking and capital markets have an MDR of 0.02%, while retail transactions are capped at Rs 300 per transaction above a threshold.

Nigam argued that the proposed 0.4% MDR is the lowest among payment networks globally. Debit cards carry an interchange rate of around 0.65%, credit cards charge higher rates, and RuPay credit cards on UPI have an MDR close to 2%.

**Industry financial impact**

Brokerages estimate the return of MDR could generate annual revenue of Rs 15,000-20,600 crore for banks, fintech companies and payment aggregators, according to a Business Standard report that cited unnamed brokerage estimates.

**Counterargument: risk of shifting back to cash**

An opinion piece in The Economic Times — written by a former secretary to the government of India — argued that charging end users could trigger a shift back to cash. The article noted that RBI’s currency printing expenditure fell 23.5% to Rs 4,875.2 crore in FY26 from Rs 6,372.8 crore in FY25, attributing the decline to digital payments growth. It also said the absolute value of currency in circulation has tripled from Rs 15 lakh crore in 2016 to about Rs 43 lakh crore in 2026, driven by taxation policies and cash usage.

The piece suggested that MDR costs should be funded from the savings banks and the RBI have made from reduced currency printing and logistics, rather than charging end users. Nigam, however, dismissed the argument that the industry should remain dependent on government support.

“The dream was never 500 million Indians. The dream is a billion Indians on UPI, and that requires more capital,” Nigam told CNN-News18, adding that the industry wants a revenue model “in line with the rest of the world.”

**Nigam defends UPI’s QR advantage**

Responding to concerns that MDR could narrow UPI’s cost advantage over card networks like Visa and Mastercard, Nigam argued that UPI’s success was driven by its low-cost QR-based acceptance network, not just pricing. Traditional card networks rely on expensive POS terminals, while UPI’s QR system enabled small vendors to accept digital payments.

“10 years ago nobody in India had heard of the word QR code,” Nigam said, according to CNN-News18.