With the Diwali festive period drawing to a close, attention is turning to the implementation of Merchant Discount Rate (MDR) charges on select person-to-merchant (P2M) Unified Payments Interface (UPI) transactions. The revised framework could mark a significant shift for India’s digital payments industry, creating a recurring revenue stream for payment companies such as Paytm and Pine Labs.
The National Payments Corporation of India (NPCI) had initially scheduled the revised MDR framework to take effect from 15 October. However, it deferred the implementation to avoid introducing additional transaction costs for merchants during the festive season.
In a statement issued on 13 October, NPCI said the charges would be implemented immediately after Diwali, with the revised effective date to be notified separately. With the festive period now over, merchants and payment companies are awaiting clarity on the rollout.
While the revised implementation date is yet to be announced, brokerage firm Emkay Global Financial Services believes the introduction of MDR could make UPI acquiring a more commercially sustainable business by replacing discretionary incentives with a contractual and recurring revenue model.
What are the revised UPI MDR charges?
According to NPCI’s FAQs released on 15 September, an MDR of 0.4% will apply to eligible P2M UPI transactions exceeding ₹2,000. However, the charge will be capped at ₹300 for transactions of ₹75,000 and above.
For instance, a merchant receiving a UPI payment of ₹1 lakh would ordinarily attract an MDR of ₹400 at the prescribed rate of 0.4%. However, owing to the transaction cap, the merchant would pay only ₹300.
Certain merchant categories will incur concessional charges rather than the standard percentage-based MDR. These include railways, telecom services, insurance, fuel, and agricultural inputs, which will incur a flat ₹5 per transaction for payments exceeding ₹2,000.
Capital market transactions, including payments to mutual funds, securities, stockbrokers, and dealers, will attract a concessional MDR of 0.02%, subject to a cap of ₹300.
Small merchants classified under the P2PM category, receiving up to ₹1 lakh per month through UPI QR codes, will continue to enjoy zero MDR.
Importantly, the revised framework applies to direct account-to-merchant-account UPI transactions. UPI-linked credit card payments are excluded.
UPI MDR: What changes for customers and merchants?
The proposed MDR is a merchant-side transaction charge and will be borne by the business receiving the payment, rather than the customer making the UPI transaction.
The revised charges will not apply to person-to-person (P2P) UPI transfers. Payments between individuals, including transfers to family members, splitting bills with friends and moving money between one’s own bank accounts, will continue to remain free.
According to Emkay Global Financial Services, the framework is expected to affect only around 4% of overall merchant transaction volumes.
The brokerage noted that although approximately 67% of P2M UPI transactions by value are above ₹2,000, the actual eligible gross merchandise value (GMV) is likely to be lower after accounting for exemptions, concessional rates and transaction caps.
Emkay also pointed out that specified sectors, including railways, telecom, insurance, fuel and agricultural inputs, account for approximately 46% of UPI P2M transaction value but will pay the concessional flat fee of ₹5 per eligible transaction.
Emkay sees recurring revenue opportunity for Paytm, Pine Labs
Emkay Global Financial Services believes the introduction of MDR could be a structural positive for the digital payments industry, particularly companies with significant UPI merchant-acquiring businesses.
The brokerage said the more important development is that UPI acquiring will now have a commercial revenue model that is contractual, recurring and linked to transaction value, replacing dependence on discretionary annual incentives.
According to Emkay, this could make the payments business structurally self-sustaining and improve the resilience of companies operating in the ecosystem.
Using conservative assumptions of realised MDR take rates of 10 basis points for Paytm and 6 basis points for Pine Labs, Emkay estimates that the two companies could generate UPI MDR revenue of ₹1,120 crore and ₹155 crore, respectively, in FY28.
The brokerage estimates that the present value of this revenue stream could add ₹43,400 crore to Paytm’s valuation and ₹5,120 crore to Pine Labs’ valuation.
Based on these estimates, Emkay has revised its target prices to ₹2,400 for Paytm and ₹230 for Pine Labs, while maintaining BUY ratings on both stocks.
What does the MDR rollout mean for payment companies?
The proposed MDR framework could provide greater revenue visibility for payment companies by allowing them to monetise a portion of eligible merchant transactions.
For Paytm and Pine Labs, which have established merchant-acquiring networks, the introduction of MDR could create an additional source of recurring income and strengthen their payments businesses.
However, the actual revenue opportunity will depend on the final implementation date, eligible transaction volumes, merchant participation and realised take rates.
For MobiKwik, the broader changes to UPI merchant payments could be relevant, but Emkay’s estimates cited above specifically quantify the potential revenue opportunity for Paytm and Pine Labs.
The revised implementation date is still awaited from NPCI. Until the regulator formally notifies the effective date, the exact timing of the rollout remains uncertain.
Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.
