Proposed UPI Merchant Charges Risk Driving Small Vendors Back to Cash, Finds ISB Study

Hyderabad, Nov 04: A new study by the Indian School of Business found that while 67% of surveyed street vendors accept UPI payments, only 52% had heard about the proposed MDR framework. Across city tiers, 45% to 53% said they would reduce UPI acceptance if the charges applied. Conducted by the Centre for Analytical Finance, at ISB, the study also highlights how charges on vendors’ larger payments to suppliers could affect them even when their own sales remain exempt. If suppliers pass these costs on, vendors say they would switch supplier payments to cash or recover the cost from customers, potentially increasing cash use or consumer costs.

Titled ‘UPI Utilisation and MDR Awareness Among Street Vendors’, the study is based on a survey of 722 street vendors across 14 states and union territories and 64 urban local bodies. The research examines UPI adoption, awareness of the proposed MDR framework and vendor responses to potential transaction charges. Announced in September 2026, the framework proposes a 0.4% 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 was postponed by the National Payments Corporation of India on October 13 until after Diwali, with a new implementation date yet to be notified.

The survey findings show that UPI adoption varies across city tiers, with 82% of vendors in Tier 1 cities accepting digital payments, compared with 66% in Tier 2 and 64% in Tier 3 cities. The study also found differences in awareness of the proposed charges, with 66% of Tier 1 vendors having heard about them, compared with 55% in Tier 2 and 47% in Tier 3. Among vendors who accept UPI payments, 64% were aware of the proposed charges, compared with 26% of those who do not accept UPI. However, awareness does not necessarily translate into an understanding of the framework's applicability, with 48% of vendors in Tier 1, 46% in Tier 2 and 33% in Tier 3 who had heard about MDR believing that the charge would apply to them.

The study further examines how vendors perceive the potential impact of the proposed charges on their businesses. Across city tiers, 53% of vendors in Tier 1 and 45% 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% of surveyed vendors in Tier 1 cities indicated that they would pass on the charge, the corresponding figures were 14% in Tier 2 and 19% in Tier 3. Such responses also point to the need for greater awareness of existing regulations that prohibit merchants from adding MDR charges to customer bills.

The research also examines the role of digital payments in vendors' wholesale procurement activities. Nearly 70% of surveyed vendors make supplier payments exceeding ₹2,000 at a time, placing these transactions within the threshold covered by the proposed framework. Further, 10.4% 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.

The study also highlights a potential link between supplier surcharges and the prices charged to customers. Among vendors who had already faced additional charges from suppliers, 30.8% indicated that they would pass on the cost to customers. This compares with 16.2% among vendors who had not yet faced such charges. The findings suggest that additional costs incurred during procurement could influence pricing decisions at the retail level.

The co-authors of the study believe that the findings call for caution in how the proposed framework is implemented. They noted that while transaction-size-based exemptions may protect small merchants at the retail level, they 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. They emphasised that any shift away from digital transactions could have wider implications for financial inclusion, transaction transparency and access to formal credit for small businesses. The researchers recommended introducing any proposed charges through limited pilot studies, tracking supplier demands, customer pricing and shifts to cash before a wider rollout. They also called for an independently reviewed account of the actual costs of operating UPI to inform decisions on how these costs should be distributed.

The study highlights the importance of considering both retail payments and wholesale procurement while assessing the implications of changes to India's digital payments framework. Its findings underscore the need to balance the sustainability of digital payment infrastructure with the continued adoption of UPI among small merchants, who form an important part of India's informal retail economy.