How UPI apps make money with zero MDR

Unified Payments Interface (UPI) is the real-time bank-to-bank payment system run by the National Payments Corporation of India (NPCI). When you scan a QR code and pay a shop, money moves from your bank account to the shop's bank account within seconds. The app on your phone is only the screen that sends the instruction.

Cards work differently. When someone pays by card, the shop pays a fee called the merchant discount rate, or MDR, a small percentage of the bill that is shared among the shop's bank, the customer's bank and the card network. UPI has had a zero MDR on ordinary merchant payments since 1 January 2020, when the government told banks and apps not to charge it. As of November 2026, that remains the position for most payments, although officials have discussed fees on larger transactions from time to time.

The result is a payment system that moves a huge number of transactions a month but pays almost nothing to the companies that built the apps. That is the puzzle this guide explains.

A UPI payment involves several parties, and each one has a cost. The customer's bank (the remitter bank) debits the money. The shop's bank (the beneficiary bank) receives it. NPCI runs the switch that connects them. A third-party application provider (TPAP), such as PhonePe, Google Pay or Paytm, supplies the app, and a sponsor bank lets that app plug into the system.

Some apps are run by banks themselves, and some by fintech companies. The fintech apps carry the cost of the app, customer support, fraud checks and the sponsor bank arrangement, yet receive no per-payment fee. That is why the way these companies earn has to be indirect.

Partly. The Union Cabinet approved a ₹1,500 crore incentive scheme in March 2025 for small-value UPI payments to merchants, covering the year from 1 April 2024 to 31 March 2025. The incentive was set at 0.15% of the transaction value, for payments up to ₹2,000 at smaller merchants. The government pays it to the shop's bank, which then shares it with the other banks and app providers involved.

The scheme is small next to the cost of running the network, and it is paid to banks first. Whether a similar scheme continues in later years is a policy decision, so check the latest Ministry of Finance notice. Founders and investors do not treat it as a business model, only as a partial offset to costs.

• Zero MDR: the shop pays no fee on a normal UPI payment.
• Incentive: 0.15% on eligible small payments, paid by the government through the shop's bank, in the scheme approved for 2024-25.
• Eligible payments: those up to ₹2,000 at small merchants, according to the Cabinet note.

PhonePe and the other large apps use UPI as the entry point and earn from what they sell next. A customer who opens the app every day to pay for groceries is also a customer who can be offered insurance, mutual funds, loans, recharges and bill payments. The company earns a commission or a distribution fee each time one of those products is sold.

The second source is merchants. A shop that accepts payments through the app can buy a speaker that announces payments, a card-swiping machine, a working-capital loan or a cash-flow tool. These devices and services are priced separately from UPI. Online payment gateways that handle website checkouts can charge their fees on cards and net banking even when UPI is free.

The third source is advertising and partnerships: brands pay to reach app users, and the app can earn from cashback campaigns run for banks or merchants. A fourth is a wallet or credit product, which can earn interchange fees and interest.

Each company has a different mix. Paytm, run by One 97 Communications, earns from payment devices for merchants, from distributing loans for lending partners and from its financial services business. Google Pay is a unit of a large technology company, so it can accept low direct revenue in exchange for user engagement and data from a service that also supports its other products.

Because the mixes differ, two apps with similar UPI volumes can have very different financial results. When reading a news story about an app's revenue, check how much comes from payments and how much from financial products, devices and loans.

NPCI set a rule that no single third-party app should handle more than 30% of the total UPI transaction volume, calculated on a rolling basis over the preceding three months. The aim is to stop one or two companies from controlling a public payment rail. The cap applies to TPAPs and not to bank-run apps.

The deadline has been pushed back several times. The latest extension, announced in December 2024, moved it to 31 December 2026. At the time of writing, PhonePe and Google Pay together handle roughly four-fifths of volume, so the cap, if enforced as written, would force a large shift. Check NPCI's current circulars before relying on the date, since regulators can extend it again.

For smaller apps, the cap is a chance to win customers, so some fintechs have pitched themselves as alternatives. For the largest apps, the risk is that growth in payments slows even though they do not earn from payments directly. For investors, the more important question is whether an app can turn its user base into profit before any change to MDR or incentives.

Look at three numbers. First, revenue split: payments, financial services, merchant services and advertising shown separately. Second, whether profit includes one-time items or the incentive. Third, the share of UPI volume against the 30% limit. A headline about a record number of UPI transactions says little about the profit of any one app, because the system itself pays the apps nothing per transaction.

This page explains a business model and a rule. It is not legal, tax or investment advice, so check the current NPCI and Ministry of Finance notices or a professional before acting on any figure.