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UPI MDR: Ushers next leg of growth for the payment ecosystem

We hosted an expert session with Ms. Upasana Taku, the Co-Founder, Executive Director, and CFO of One MobiKwik Systems, and Mr. Karthik Subramaniam, Head of Banking Alliances and Partnerships at MobiKwik Systems, to discuss the recent introduction of MDR on select UPI transactions. Ms. Taku believes the move marks a structural shift for the Indian payments ecosystem, as UPI transitions from a high-volume but largely un-monetized platform into a commercially viable payment rail. The introduction of MDR should improve the economics for payment aggregators, TPAPs, and banks, creating greater incentives to invest in merchant acquisition, digital infrastructure, and fraud prevention. While only ~4% of transactions by count are expected to attract MDR, the eligible transactions could account for ~15-20% of UPI Merchant GMV, creating a meaningful revenue opportunity. Ms. Taku expects MobiKwik to be a key beneficiary, given its merchant-acquiring capabilities and Pocket UPI franchise, with ~INR1.50b incremental gross revenue potential from MDR and ~25% flow-through to the bottom line. Following are the key highlights from the discussion:

UPI MDR changes the economics of the payment ecosystem

The introduction of MDR is expected to materially improve the monetization potential of UPI and create a commercial incentive for participants across the ecosystem to invest in growth. Ms. Taku believes the overall 40bp MDR on eligible P2M transactions could be distributed across the acquiring side, issuer bank, and consumer side, with an indicative 30:40:30 split between acquiring participants, issuer banks, and TPAP/consumer-side participants. The exact allocation is still evolving, but the key change is that participants will now have a direct economic incentive to scale UPI volumes. This should support higher investments in merchant onboarding, fraud prevention, cybersecurity, and technology infrastructure.

Only a small share of transactions is eligible, but GMV impact is meaningful

While only ~4% of UPI transactions by count are expected to attract MDR, the eligible transactions could represent ~15-20% of UPI GMV, as the threshold is linked to transaction value. She believes this distinction is important, as the revenue opportunity for payment intermediaries will be driven by the value of transactions rather than absolute transaction count. At the same time, the majority of everyday UPI payments will continue to remain free, limiting any significant disruption to the mass-market use case. She expects the initial implementation to evolve further as banks and payment companies gain greater clarity on the economics and finer details of the framework.

MDR creates a meaningful opportunity for MobiKwik

MobiKwik stands to benefit from the introduction of MDR through both merchant and consumer-side UPI monetization. Ms. Taku expects the company to generate ~INR1.5b incremental gross revenue in FY28 from UPI MDR, including merchant-side and consumer-side monetization and relevant bill-payment revenue. Of this, around 25% could flow through to the bottom line, translating into ~INR370-380m of incremental contribution/PAT boost.

Own acquiring rails provide an important competitive advantage

MobiKwik's merchant-acquiring model gives it an advantage in retaining the economics generated from MDR. Unlike players dependent on an acquiring bank's rails, MobiKwik operates merchant acquiring through its own wallet/PA infrastructure while using a sponsor bank for settlement. This allows it to better retain the acquiring-side benefits. Management indicated that where a payment aggregator relies on an acquiring bank's infrastructure, the acquiring economics could effectively be shared between the PA and the partner bank. The own acquiring capability therefore provides MobiKwik with greater operating leverage as merchant volumes scale, and this could become increasingly valuable under the new MDR framework.

Pocket UPI offers an additional layer of monetization

The current MDR framework does not provide clarity on PPI/wallet-linked UPI transactions, leaving Pocket UPI as an additional opportunity for MobiKwik. Management expects a separate framework for wallet-on-UPI transactions and believes the eventual MDR could be higher than the standard UPI rate. More importantly MobiKwik could capture a larger share of this economics as it participates on both the issuer as well as consumer-facing side. She indicated that Pocket UPI could add few tens of crores to the current INR1.5b opportunity, although the timing and final economics are to be watched. Given MobiKwik's sizeable wallet franchise, the opportunity could therefore be more meaningful for bottom-line growth than just topline alone.

Merchant acquisition and competitive intensity should both increase

The introduction of MDR changes the return profile of merchant acquisition. Historically, payment companies had to absorb significant fixed costs related to onboarding and servicing merchants despite limited direct monetization from UPI transactions. With MDR, incremental transaction volumes can now contribute directly to revenue, potentially accelerating merchant acquisition and improving the economics of existing merchants. Ms. Taku expects competitive intensity and marketing spends to increase as banks and fintechs seek to capture UPI market share. However, increasing focus on sustainable P&Ls among listed and listing-stage fintech companies should prevent a return to growth-at-all-cost model, with profitability expected to gain greater importance.

UPI transactions should continue to increase despite MDR

Management does not expect the introduction of MDR to materially alter UPI's long-term growth trajectory. While there could be some initial friction among merchants and consumers, UPI remains structurally cheaper than alternative payment instruments. UPI transactions remain free below INR2,000 and attract 40bp above the threshold, compared with materially higher MDRs for debit and credit cards. Large merchants are therefore unlikely to shift away from UPI purely because of MDR, especially as they already incur higher charges on card transactions. UPI also provides merchants with benefits such as formal settlement trails and access to lending products, which should continue to support adoption and reduce the likelihood of a meaningful shift back toward cash.

Tier 3/4 markets remain the next growth opportunity

The next leg of UPI growth is expected to come from deeper penetration into smaller cities and towns as merchant acceptance expands. She highlighted that merchant onboarding in tier-3 and tier-4 markets remains a significant opportunity, particularly as merchants continue to migrate toward digital acceptance. Importantly, a large proportion of initial transactions in these markets will continue to fall within the MDR-free category or essentialservice framework. Nevertheless, the ability to monetize higher-ticket transactions provides payment companies with greater incentive to invest in these markets and build merchant density over time. As such, the change in P&L economics could support faster expansion beyond the existing urban merchant base.

Overall view

We believe the introduction of UPI MDR is a structural positive for the payments ecosystem as it improves the commercial viability of a payment rail that has historically generated substantial volumes but limited direct monetization. The limited share of eligible transactions should ensure that UPI remains the dominant digital payment instrument, while higher-value transactions can now generate revenue for payment intermediaries and banks. For MobiKwik, the opportunity is particularly attractive given its merchant-acquiring infrastructure and Pocket UPI franchise. The estimated ~INR1.5b incremental gross revenue opportunity, along with potential additional upside from wallet-on-UPI, would accelerate the company's path toward sustained improvement in profitability.

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