IIT Bombay proposes new UPI merchant discount rate formula

A study by IIT Bombay has introduced a new formula for determining merchant discount rates (MDR) on Unified Payments Interface transactions, addressing long-standing concerns about revenue sharing in India's digital payment ecosystem.

The research addresses the structural economics of how payment system revenues are divided between financial institutions, payment service providers, and merchants. The institute's analysis aims to create a more balanced framework that accounts for operational costs while maintaining affordability for merchants adopting digital payment methods.

The proposal represents an attempt to resolve ongoing tensions over UPI pricing, which has been a contentious issue since the Reserve Bank of India and the National Payments Corporation of India established regulatory guidelines for the platform. Stakeholders have previously disagreed over what constitutes a fair rate that sustains infrastructure investment without burdening small and medium-sized merchants.

While IIT Bombay's formula offers a technical contribution to the debate, final decisions on MDR policies remain with the government and relevant regulatory authorities. The Reserve Bank of India and NPCI will need to evaluate whether the institute's recommendations align with broader policy objectives around financial inclusion and digital payment adoption.

The study adds to growing academic and industry discourse on pricing mechanisms for India's payments infrastructure as digital transaction volumes continue to expand.