A new study by the Indian School of Business (ISB) warns that the proposed Merchant Discount Rate (MDR) framework for UPI transactions could inadvertently reverse digital payment adoption among India’s street vendors, pushing them back toward cash-based transactions and threatening recent gains in financial inclusion.
The study, titled “UPI Utilisation and MDR Awareness Among Street Vendors,” was conducted by ISB’s Centre for Analytical Finance (CAF). Based on a survey of 722 street vendors across 14 states, union territories, and 64 urban local bodies, the research highlights a critical vulnerability in how transaction charges could ripple through the informal economy.
While 67% of surveyed street vendors currently accept UPI payments, the study found that between 45% and 53% across different city tiers stated they would reduce their acceptance of digital payments if the new charges were applied.
The Wholesale Squeeze
A central finding of the research is that the impact of the MDR framework will be felt most acutely not on the sales side, but on the procurement side. The proposed framework, announced in September 2026, introduces a 0.4% charge on UPI transactions above ₹2,000. While small merchants receiving up to ₹1 lakh per month through QR-based payments are exempt, they are not shielded from charges when making payments to their own suppliers.
The study notes that nearly 70% of surveyed vendors make supplier payments exceeding ₹2,000 at a time, placing these wholesale transactions squarely within the proposed framework’s threshold.
Alarmingly, 10.4% of vendors reported that their suppliers had already begun asking them to pay additional charges for UPI transactions in the ten days preceding the survey. The research points to a stark reaction to this pressure: vendors indicated they would switch entirely to cash for supplier payments if such additional charges were imposed, or attempt to recover the cost from customers.
Awareness Gap and Misconceptions
The rollout of the policy has been shadowed by a significant awareness gap. Only 52% of surveyed vendors had heard about the proposed MDR framework. Furthermore, awareness does not equate to accurate understanding. The study found that 48% of Tier 1 vendors, 46% of Tier 2, and 33% of Tier 3 vendors who had heard about the MDR incorrectly believed the charge would apply to their everyday, small-value retail sales.
The research also found that some vendors are considering passing the cost onto consumers. While 30% of surveyed vendors in Tier 1 cities indicated they would pass on the charge, the figures were 14% in Tier 2 and 19% in Tier 3. The study explicitly notes that such responses highlight the need for greater public awareness of existing regulations that strictly prohibit merchants from adding MDR charges to customer bills.
Calls for Caution and Pilot Testing
The National Payments Corporation of India (NPCI) had originally scheduled the framework’s implementation for October 15, 2026, but postponed the rollout on October 13 until after Diwali, with a new implementation date yet to be notified.
In light of the survey results, the CAF study urges policymakers to proceed with caution. It warns that if suppliers pass on these charges, vendors could face additional pressure on their already limited margins, making cash a more attractive payment option. Such a shift would have wider implications for financial inclusion, transaction transparency, and small businesses' access to formal credit.
To mitigate these risks, the study recommends:
1. Introducing any proposed charges through limited pilot studies to track supplier demands, customer pricing, and shifts to cash before a wider rollout.
2. Conducting an independently reviewed assessment of the actual costs of operating UPI to inform fair decisions on how these costs should be distributed across the ecosystem.
As the government and NPCI weigh the next steps, the ISB study serves as a timely reminder that policies designed to sustain digital payment infrastructure must carefully account for the fragile economics of India’s smallest merchants.
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