Payment Economics and UPI changes

Last year, while returning from Goa, we had some time to kill at the airport. So, we decided to stop by the lounge. Both (wife and I) are salaried and have a salary account with one of the largest banks in India. Our hope was free airport lounge access was one of the perks associated with debit card tied to salary account. It turned out, our card did not have that benefit. So, instead ate somewhere else. Then during the flight, we had some discussion and I was “asked” to talk to the bank and follow-up on the matter.

Then few days later; out of the blue, I got a call from virtual relationship manager (VRM) tied to our account. During the call I asked the question (I had forgotten to call and ask it) about airport lounge access. Then VRM clarified you need to spend ₹15,000 (~ $156) in the quarter to get access to lounge. One of the reasons why Banks can give these privileges and perks is they collect money when you spend using certain instruments. Card products have very well-defined reward structure as they have been around for a long time. This applies to both Debit and Credit cards (in fact rewards are more prominent on credit cards, Last year credit card rewards sponsored our tickets for AR Rahman’s concert).

The whole point of this reward refresher is hopefully it offers context around ongoing debate around MRD charges for UPI (for details on how MRD charges work, please refer to this excellent article).

From 15 October 2026, eligible person-to-merchant UPI payments above ₹2,000 (~ $21) will attract an MDR of 0.4%, capped at ₹300 ($3.25) per transaction. Payments up to ₹2,000 (~ $21) , person-to-person transfers and eligible small merchants remain outside the standard charge. Consumers are not meant to pay the fee directly.

The calibration matters. More than 95% of UPI merchant transactions by volume are reportedly below the ₹2,000 (~ $21) threshold, so everyday usage should remain largely untouched. Meanwhile, the ₹300 (~ $3.25) cap limits the cost of high-value payments. The framework is therefore less a blanket fee on UPI and more a targeted attempt to monetise larger commercial transactions.

This is good move for all the players involved. Banks will be able to make some money and pass on the benefits to various players in the ecosystem. This new rule set is expected to drive some changes. Chances are subset of merchants will try to pass on these MDR charges to buyer. However, as a buyer you can always use debit card to avoid that (and this will also help with card rewards like ₹15,000 quarterly spending for lounge access!). Here is an idea around how to go about it (obviously this is my thinking and there are a lot of other options available) –

1. Spending for street side vendors (vegetables, fruits, coconut water) – continue with UPI as these are way below ₹2000 MDR threshold
2. Spending at supermarket, malls, restaurant, coffee shops – if card is accepted use card (PS – I’ve tokenized my card in cell phone and use it for tap to pay).

IMO, MDR is a welcome change. As a consumer I am looking forward to better rewards and hopefully era of “better luck next time” will end soon!