Proposed UPI MDR may drive small vendors back to cash: ISB Study

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The study said while 67% of the surveyed street vendors accepted UPI payments, only 52% had heard about the proposed MDR framework

By BL Hyderabad Bureau

Updated - November 04, 2026 at 09:42 PM. | Hyderabad

The proposed Merchant Discount Rate (MDR) framework for UPI payments could affect street vendors who make payments exceeding ₹2,000 to procure supplies, potentially prompting them to shift to cash transactions or pass on the additional cost to customers, according to a study conducted by the Indian School of Business (ISB).

Titled ‘UPI Utilisation and MDR Awareness Among Street Vendors’, the study, conducted by the Centre for Analytical Finance (CAF) of ISB, is based on a survey of 722 street vendors across 14 States and Union Territories and 64 urban local bodies. 

The research examined UPI adoption, awareness of the proposed MDR framework and vendor responses to potential transaction charges.

Announcing the findings of the study at a press conference here on Wednesday, CAF Director Prasanna Tantri and coauthors of the survey report, Anand Sudhakaran and Mohan Ramnath, said while 67 per cent of the surveyed street vendors accepted UPI payments, only 52 per cent had heard about the proposed MDR framework.

Announced in September 2026, the MDR framework proposed a 0.4 per cent charge on transactions above ₹2,000, while exempting small merchants receiving up to ₹1 lakh per month through QR-based payments.

Originally scheduled for implementation on October 15, the rollout has been postponed by the National Payments Corporation of India (NPCI) on October 13 until after Diwali, with a new implementation date yet to be notified. The survey was conducted telephonically between September 24 and October 10, 2026 

Reduction in UPI usage

Across city tiers, 45 to 53 per cent of the participants said they would reduce UPI acceptance if the charges were applied. The charges on vendors’ larger payments to suppliers could affect them even when their own sales remain exempt, as per the survey. 

If suppliers pass on these costs, vendors said they would switch supplier payments to cash or recover the cost from customers, potentially increasing cash usage or consumer costs.

Nearly 70 per cent of the surveyed vendors make supplier payments exceeding ₹2,000 at a time, placing these transactions within the threshold covered by the proposed framework. Further, 10 percent of vendors reported that their suppliers had asked them to pay additional charges for UPI transactions in the ten days preceding the survey.

“The findings indicate that such charges could influence vendors’ own payment preferences, with all respondents indicating that they would switch to cash if suppliers imposed an additional charge for UPI payments,” Mohan said.

Across city tiers, 53 per cent of vendors in Tier 1 and 45 per cent each in Tier 2 and Tier 3 indicated that they would reduce UPI acceptance if MDR were applied. The findings also show that vendors may consider passing on additional costs to customers.

While 30 per cent of the surveyed vendors in Tier 1 cities indicated that they would pass on the charge, the corresponding figures were 14 per cent in Tier 2 and 19 per cent in Tier 3. Such responses also pointed to the need for greater awareness of existing regulations that prohibit merchants from adding MDR charges to customer bills. 

Adoption of UPI MDR

The survey findings showed UPI adoption varied across city tiers, with 82 per cent of vendors in Tier 1 cities accepting digital payments, compared with 66 per cent in Tier 2 and 64 per cent in Tier 3 cities.

It also found differences in awareness of the proposed charges, with 66 percent of Tier 1 vendors having heard about them, compared with 55 per cent in Tier 2 and 47 per cent in Tier 3.

Among vendors who accept UPI payments, 64 per cent were aware of the proposed charges, compared with 26 per cent of those who do not accept UPI. 

However, awareness does not necessarily translate into an understanding of the framework’s applicability, with 48 per cent of vendors in Tier 1, 46 per cent in Tier 2 and 33 per cent in Tier 3 who had heard about MDR believing that the charge would apply to them.

The CAF study calls for caution in implementing the proposed framework. While transaction-size-based exemptions may protect small merchants at the retail level, these do not necessarily account for the costs incurred through wholesale procurement. 

If suppliers pass on these charges, vendors could face additional pressure on their already limited margins, making cash a more attractive payment option.

“Any shift away from digital transactions could have wider implications for financial inclusion, transaction transparency and access to formal credit for small businesses,” Prasanna Tantri said.

CAF recommended introducing any proposed charges through limited pilot studies, tracking supplier demands, customer pricing and shifts to cash before a wider rollout. It also recommended an independently reviewed account of the actual costs of operating UPI to inform decisions on how these costs should be distributed.

Published on November 4, 2026

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