UPI fee to boost banks' revenue, revive card, ATM biz

Banks could gain ₹70–100 crore in quarterly revenue from the reintroduction of UPI MDR, with larger lenders potentially earning nearly three times more. The 0.4% fee on select transactions above ₹2,000 may also boost card payments and support UPI’s long-term financial sustainability.

New Delhi: The reintroduction of merchant discount rate (MDR) on select unified payments interface (UPI) transactions could bring a sizeable boost to banks' revenues, according to senior officials at four state-run banks that Mint spoke with. The move could also make debit and credit cards more competitive, they said.

Mid-sized public sector lenders can expect the move to add roughly ₹70-100 crore each to their quarterly revenues, while their larger peers could see gains of nearly three times that amount, the officials said.

“The move could also improve the economics of debit and credit cards and, over time, support the viability of ATM networks that have been squeezed by the rapid shift to UPI,” said one of the bankers on the condition of anonymity.

The government, however, does not expect the new UPI transaction fee to trigger any meaningful shift back to cash, as a senior official argued that the 0.4% charge remains significantly below the cost of competing payment networks and will be borne within the merchant ecosystem.

Under the new norms announced on Tuesday, from 15 October, a 0.4% MDR will apply to specified person-to-merchant (P2M) UPI transactions of over ₹2,000, with the charge capped at ₹300 per transaction for payments of ₹75,000 and above. Person-to-person transactions and P2M payments up to ₹2,000 will not attract the charge. Eligible small merchants receiving up to ₹1 lakh a month through UPI QR under the P2PM category will also remain outside the conventional MDR framework.

Certain essential categories, including railways, telecom, insurance and fuel, will attract a flat ₹5 MDR above the applicable threshold.

The government official said the MDR was deliberately kept at a competitive level to avoid undermining digital payments. UPI had an MDR of 0.4-0.6% before the government moved to a zero-MDR regime, the official said.

“It is still the lowest rate amongst the available options,” the official said, pointing out that other payment networks typically operate at MDRs of around 0.8-2.0%.

One of the bankers citd above said the impact could nevertheless be significant for banks because higher-value merchant transactions account for a disproportionate share of UPI's value.

National Payments Corp of India's data shows that transactions of up to ₹2,000 constitute over 95% of P2M transaction volume. And industry estimates show that while transactions of over ₹2,000 make for only about 4% of P2M volumes, but roughly 67% of their value.

UPI processed about 24,162 crore transactions worth around ₹314 lakh crore in FY26 and accounted for about 84% of India's digital payment volume. Monthly UPI transactions recently topped the 2,300-2,450 crore range.

Banks also see a potential benefit in credit card payments, particularly for larger purchases. In India, credit cards in use were at 122.86 million in July 2026, up from 111.6 million a year ago. Monthly spends on these cards totalled around ₹2 trillion in July this year.

Asked if the MDR move could signal a revival in ATM use, the government official said that was "pure speculation”.

Reserve Bank of India data shows the number of ATMs has fallen from a peak of nearly 2.55 lakh in FY23 to about 2.51 lakh in FY25, with further declines thereafter. ATM cash withdrawals through debit cards fell from about 68,975 lakh transactions in FY23 to 53,394 lakh in FY26, while their value declined from ₹32.8 lakh crore to ₹28.5 lakh crore.

Bankers, however, expect some of this pressure to ease if higher-value payments become marginally more expensive through UPI.

The larger policy objective is to establish a sustainable business model for UPI, as the platform scales further. The official said the government could not continue subsidizing the payment ecosystem indefinitely, given the infrastructure, cybersecurity and operational costs involved.

“There has to be some business model, even if it applies to a very small percentage of merchants,” the official said.

The official said cybersecurity and scalability would become increasingly important, as digital payments expand. Government estimates that around 600-700 million people are currently part of the digital payments ecosystem, and it is targeting expansion to around 1 billion.

According to the official, the MDR decision creates a revenue stream from a relatively small portion of higher-value merchant transactions, while retaining zero charge on low-value payments and no burden on consumers.

“This would give a further boost to the investments in the payments infrastructure. A substantial portion of additional incomes is also likely to be used for incentives, etc. Overall, the banking system would benefit by better investment and remunerative returns,” said Sanjay Agarwal, senior director at CareEdge Ratings.

Queries emailed on Wednesday evening to the finance ministry, 12 public sector banks did not get an immediate response.

India currently has 12 public sector banks. As of 31 March 2026, their combined business (deposits plus advances) was at ₹283.3 lakh crore, up 12.8% year-on-year. Aggregate deposits rose 10.6% to ₹156.3 lakh crore, while gross advances grew 15.7% to ₹127 lakh crore. The PSBs posted a record aggregate net profit of ₹1.98 lakh crore in FY26, a rise of about 11%, marking the fourth consecutive year of overall profitability.

Their asset quality also improved sharply, with the average gross non-performing asset ratio falling to a historic low of around 1.9%.