Will UPI MDR be a new revenue engine for fintech firms?

The ecosystem is bullish on valuations of fintech firms following the government’s introduction of the merchant discount rate (MDR) on UPI transactions above Rs 2000.

The positive strides began with Paytm’s stock price moving up 7% on Wednesday.

Investors and people aware of the sector say valuations may witness an upward trend for the next few quarters, adding that the exact effect can be determined only thereafter.

“The recent introduction of UPI MDR can make established incumbent payment-led businesses inherently more profitable,” said Deepak Gupta, General Partner, WEH Ventures. He added that investors can now invest in payments as a standalone business, rather than expecting companies to make money later from selling other financial products or services to their payments customers.

The government has set a 0.4% charge on UPI payments above Rs 2,000 to merchants and capped the fee at Rs 300 for payments of Rs 75,000 and above as it rolled out a framework for large digital merchant payments. 

According to investor and trader Meshach Manohar, who closely tracks the fintech space, the impact of MDR on valuations could be limited.

“Until now, fintech companies have offered UPI transactions for free largely to collect transaction data and understand customers' buying patterns. That data could then be used for cross-selling credit and other financial products,” he said.

While the new MDR could provide a small boost to the companies' revenues and profits, it is unlikely to have a major impact on their bottom line, he added. "There could be a few percentage points of improvement in profits, perhaps around 0.5% to 1%, particularly in the first two quarters.”

While fintech and payment firms are largely cheering the recent development, experts caution that it is too early to understand the direction it could take.

“We had taken UPI for granted, but if I am charged like a credit card, then I will stop using it. If everyone is justifying, you don’t know customer behaviour. The festive season will show what is happening, but we need to wait for two to three quarters," said Manohar.

He added, “For every UPI transaction, the failure rate is 13%, so public sector banks are bleeding. We need resilience and new ways of thinking about UPI for a wider ecosystem."

Experts also believe it is still premature to talk about how fintech companies such as Paytm or Razorpay will be affected since consumer behaviour is uncertain. 

However, brokerage firms like Jefferies and Goldman Sachs have indicated that Paytm and Pine Labs are set to benefit in big way from the move.

According to Jefferies, "the industry could generate Rs 150 billion to Rs 180 billion in revenue, to be distributed across issuers, payment apps, acquirers and banks."

Jefferies raised its FY28–29 earnings estimates for Paytm by 10–12%, citing potential upside from UPI MDR. The brokerage assumes an effective 40-basis-point revenue pool after accounting for exemptions and pricing pressures. It has also increased its FY27 profit forecast by 18% to reflect an initial MDR benefit.

Meanwhile, Goldman Sachs sees ~40-70% potential upside to our FY28 EBITDA estimates for Paytm. 

“​​We note that some online merchants already pay a flat or cost-plus fee on payment instruments, which may reduce the incremental revenue pool for the industry, though we estimate Paytm has a relatively lower share within online merchants.”

The report by Goldman Sachs also says the calculation implies about Rs 206 billion of potential revenue pool for the industry from the announced UPI MDR. 

Goldman Sachs has maintained a ‘Buy’ rating on Paytm with a 12-month price target of Rs 1,500, citing strong underlying earnings growth and continued market-share momentum, which it expects to support elevated valuation multiples.

Emkay Global, meanwhile, estimates that Paytm could generate Rs 11.2 billion in UPI MDR revenue in FY28, assuming a conservative realised take rate of 10 basis points. It estimates the present value of these incremental earnings at Rs 434 billion, prompting it to raise its price target on Paytm to Rs 2,400 while retaining its ‘Buy’ rating.

The impact will extend beyond payment companies.

PhonePe, which is reportedly reviving its IPO plans, could benefit from the greater revenue visibility, while brokers such as Zerodha could face higher costs as UPI becomes chargeable for certain transactions.

Jefferies estimates that of the 40 basis points MDR, around 16 bps could accrue to issuing banks, 12 bps to acquiring banks, 8 bps to the payer's TPAP (third-party application provider) or payment app, and 4 bps to the PSP (payment service provider) bank. This distribution will determine how much of the new revenue pool ultimately accrues to individual players. 

Feature image: Nihar Apte