Who should bear the cost of digital public infrastructure: the state, banks, or users?

India's UPI has run at zero Merchant Discount Rate (MDR) since January 2020, mandated through Section 10A of the Payment and Settlement Systems Act, 2007 and Section 269SU of the Income-tax Act, 1961 [2]. With MDR set to begin from 15 October, the cost question reopens: the burden is best shared and calibrated, not loaded on any single actor.

The case for the state — and its limit

• Digital public infrastructure is a public good; ₹2,000 crore budgeted this year is modest against 18,737 crore digital transactions in FY 2023-24 [1][4].
• But the subsidy is a year-to-year Cabinet approval, first cleared for one year from April 2022 [2], rising only from ₹1,500 crore (FY25) to ₹2,000 crore while UPI volumes grew at a 69% CAGR [3][4].
• A pot that does not scale with volume is fiscally comfortable but strategically unstable.

Banks already bear the residual cost

• The incentive pays just 0.15% on P2M transactions up to ₹2,000 for small merchants; above that, and for all large merchants, banks earn nothing [3].
• The Finance Ministry itself concedes MDR will not cover the full cost of running UPI [1]. Uncompensated cost invites under-investment in fraud control and grievance redress.

Users and merchants — a bounded role

• Section 10A bars banks from charging the payer or payee, so preventing pass-through to customers rests on persuasion via the IBA and traders' bodies, not enforcement [1][2].
• RBI's Discussion Paper on Charges in Payment Systems (August 2022) already invited public views on this trade-off [5].
• Brazil's Pix charges firms about 0.33%, far below debit (1.13%) and credit cards (2.34%), while keeping individuals free [6].

The fair settlement is therefore tiered: the state should fund small-merchant transactions through a published, multi-year formula rather than annual budget lines; large merchants should pay a small, permanent, transparent MDR; retail users should remain free. RBI publishing per-transaction cost data, and amending Section 10A before collection begins, would keep the shift legally sound and preserve UPI's inclusion gains.