The world's love affair with transacting and paying without even touching legal tender money is older than most of us think. It began in 1958, when Bank of America mailed unsolicited credit cards to approximately 60,000 residents of Fresno, California, under the brand “BankAmericard”. What became known as the “Fresno Drop” was a radical experiment in the history of banking i.e. putting a ready-to-use line of credit into people's hands before they even knew of and had even asked for one.

By 1976, seeking a name that could travel easily across borders and banks, “BankAmericard” became “Visa”. Its rival, born a decade later as “Interbank”, eventually became “Mastercard”. Over the following four decades, these two payment networks helped transform the way the world paid, taking us from cash in our wallets to a small piece of plastic in our hands and eventually to online payments without even using the erstwhile plastic.

India joined the party much later. The licence-raj economy, which India then was, had little use for global payment systems namely Visa and Mastercard, though credit cards were first introduced in the 1980's itself. To be precise, the credit-card era began in 1980, when Central Bank of India launched CentralCard. Visa-branded cards followed in 1981, when Andhra Bank introduced its Visa Classic. Mastercard's relationship with India also dates to 1981, initially through Central Bank of India, while its domestic operations and wider issuance of Mastercard cards developed later in the 1980s.

India's economic landscape had a path-breaking change in 1991, when a balance-of-payments crisis forced the hands of the then Prime Minister P. V. Narasimha Rao and his finance minister, Manmohan Singh. Liberalisation opened India's markets to foreign capital, goods and also to foreign wallets i.e. Visa and Mastercard, who could now walk into India more freely, through the same door as multinational manufacturers and mutual funds.

What followed was a crowded bazaar of payment instruments namely, closed-system loyalty cards, semi-closed metro cards, charge cards, ITZ cards, Oxigen recharge cards and coupons, alongside credit and debit cards and the very first online payment gateways. The regulatory framework was fragmented and, for many of these instruments, there was no specific payments-regulation regime governing the acceptance, safeguarding and settlement of customer funds. Anyone with a scheme, a server and a bit of nerve could collect money today for value redeemable tomorrow, while questions of how safely that money was held, how it was netted or settled, and what happened to customers' money if the scheme collapsed often fell outside a dedicated statutory framework.

The Reserve Bank of India (RBI) eventually recognised the risks this created for consumers and began putting in place guidelines for payment systems, including rules around settlement, safeguarding of funds and escrow arrangements. The writer had the good fortune of contributing inputs to the RBI at that stage, drawing on first-hand experience of advising clients caught in an emerging and largely unregulated payments environment.

These efforts culminated in the Payment and Settlement Systems Act, 2007, which came into force in August 2008. The Act gave the RBI the statutory framework to regulate and supervise payment systems in India, covering a wide range of payment arrangements and instruments, including cards and money transfer systems. It became the quiet legal foundation behind much of what followed, from card payments and wallets to, eventually, the Quick Response (QR) code sitting on the counter of almost every Indian shop today.

Against this backdrop, India's own payment systems must be seen as a remarkable success. RuPay, launched by the National Payments Corporation of India (NPCI) in 2012, and the Unified Payments Interface (UPI), launched in 2016, transformed the way India pays. From January 2020, the Merchant Discount Rate (MDR) on UPI and RuPay debit-card transactions was made zero, with the Government introducing incentive schemes to support the payment ecosystem. This was the gift the Government had so far reserved for the new Digital India. The world watched with much astonishment as the Indian payments industry grew by leaps and bounds, with the entire infrastructure being created at no cost to merchants or consumers, who were the final participants in the entire system.

UPI has since grown at a breathtaking pace. Its monthly transaction value rose from about ₹4.16 lakh crore in December 2020 to ₹23.25 lakh crore in December 2024. By July 2026, UPI was processing more than 23.65 crore transactions a day, with monthly transaction value touching ₹29.87 lakh crore. What began as an Indian payment system has now travelled beyond Indian shores. UPI is now operational in countries including Bhutan, Nepal, Singapore, the UAE, France, Sri Lanka, Mauritius and Qatar, with further international linkages being added.

This makes the recent notification of 14 September 2026 all the more significant. Two official actions followed one another and were, understandably, mixed up. First, the Ministry of Finance, exercising the power conferred by the newly amended Section 10A^[1] of the Payment and Settlement Systems Act, 2007, notified that no bank or payment system provider may impose, directly or indirectly, any charge on a person making or receiving a payment through a RuPay-powered debit card, or through UPI for transactions up to the limit prescribed by the Government (which was fixed at ₹2,000 per transaction). This is a restriction created through a notification issued under an enabling statutory provision. Parliament has empowered the Central Government to specify, from time to time, the electronic modes of payment that must remain free of such charges.

Separately and this is what the newspaper reports largely focussed on, the NPCI announced the pricing framework for specified UPI merchant transactions above that threshold. From 15 October 2026, eligible person-to-merchant UPI transactions above ₹2,000 will attract a MDR of 0.4 per cent, capped at ₹300 per transaction. Thus, a ₹40,000 purchase would carry an MDR of ₹160, while a transaction of ₹75,000 or more would attract the maximum ₹300. Certain categories, including railways, fuel, insurance and telecom, will instead attract a flat MDR of ₹5 for transactions above ₹2,000. Person-to-person transactions remain free irrespective of value, as do UPI transactions up to ₹2,000. Small merchants receiving up to ₹1 lakh a month through UPI QR under the P2PM framework will also continue to enjoy zero MDR. New MDR framework is tabulated for easy reference as under :-

UPI MDR from 15 October 2026 - At a Glance

What does this mean in practice?

• ₹2,000 UPI merchant payment = Nil MDR
• ₹40,000 UPI merchant payment = ₹160 MDR
• ₹75,000 UPI merchant payment = ₹300 MDR (maximum)
• ₹3,000 UPI payment in a specified category = ₹5 MDR

The important legal distinction is therefore this. The Government has not imposed a UPI charge by notification. Firstly it has specified the transactions that must remain charge-free under Section 10A. Thereafter, the NPCI, through the UPI framework, has separately prescribed MDR for specified transactions that fall outside that protected category. The charge is an MDR payable within the payment ecosystem by the concerned merchant, not a transaction fee payable by the consumer.

There is, however, a case for reconsidering the economics of zero-MDR payments. Industry estimates put the annual cost of operating and maintaining the UPI ecosystem, including cybersecurity, fraud prevention, settlement infrastructure, technology and system upgrades at around ₹20,000–20,700 crores. Against this, the Government's incentive outlay for maintaining zero MDR has been relatively modest, it reportedly fell from ₹3,631 crore in FY2024 to around ₹437 crore in the current year. The figures raise an obvious question. If this UPI / RuPay infrastructure has to be continuously maintained, secured and upgraded, who should ultimately bear its cost? Large merchants, who also benefit from the lower costs and operational convenience of digital payments compared with cash handling, is one possible answer.

The change also addresses a separate international trade concern. The United States Trade Representative has criticised aspects of India's UPI and RuPay framework on the ground that India's zero-MDR policy and related measures disadvantage international card networks such as Visa and Mastercard. That criticism adds another dimension to the debate, the question is no longer merely who pays for India's digital-payment infrastructure, but also whether the regulatory framework governing that infrastructure remains competitively neutral as Indian payment systems expand. The answer to the question “who pays ?” is in a sense a foregone conclusion. There are no free lunches in this word. The business persons, especially merchants are not here for charity. There is no cost in this world on such merchants, which they would not want to pass on to the consumers.

But every silver lining has its cloud. Some critics of the government state that the ₹2,000 protection is a “mirage”, arguing that the present framework could eventually lead to UPI users having to pay much more for transactions, and questioning the manner in which the law was passed.

There is, however, a narrower legal concern worth examining. Parliament has not itself prescribed the MDR or determined which UPI transactions will carry a charge. Instead, the amended PSS Act creates the statutory framework within which the Central Government may specify, by notification, the electronic modes of payment that must remain free of charges. The subsequent MDR framework has been prescribed by NPCI for specified merchant transactions above the protected threshold.

There is also a competition question. UPI is an open payment infrastructure, but a large part of its transaction volume is processed through a small number of third-party applications. PhonePe and Google Pay together accounted for about 79 per cent of UPI transaction volume in May 2026, although their combined share has been declining as other players have gained ground. A fee structure introduced into such a concentrated market therefore raises a legitimate question about how the costs and revenues of the system will be distributed among banks, payment applications, merchants and other participants.

For smaller traders operating on thin margins, even a modest MDR could influence payment preferences. Whether that results in higher prices, absorption of the cost by merchants, or a return to cash for some high-value transactions remains to be seen. The real test will be whether the new framework succeeds in making the UPI ecosystem financially sustainable without weakening the very convenience and low-cost access that made it so widely adopted.

Of course, nothing changes for the consumer buying vegetables from a street vendor or splitting a bill with a friend. But once larger UPI payments acquire a cost, merchants may absorb it, pass it on, or quietly steer customers back to cash. If that happens, the irony will be hard to miss. the country that led the world towards a cashless future may find cash making a comeback. UPI may have changed the way India pays. But if convenience comes with a price, cash may yet have the last laugh and be the king again.

1. 10A. No bank or system provider shall impose, whether directly or indirectly, any charge upon a person making or receiving a payment by using one or more electronic modes of payment as the Central Government may, by notification, specify. ↑

   Author is the Founder & Managing Partner of Lexport. Views are personal.