More than half of small vendors in India's largest cities could scale back their acceptance of Unified Payments Interface (UPI) payments if the proposed merchant discount rate (MDR) framework is implemented, according to a new study released on Wednesday, 4 November 2026. The findings, from the Centre for Analytical Finance (CAF) at the Indian School of Business (ISB), raise fresh concerns about the rollout's impact on the country's digital payments ecosystem.

Key Findings from the ISB Survey

The study found that 53 per cent of vendors in Tier 1 cities indicated they would reduce UPI acceptance if the MDR framework takes effect, while the figure stood at 45 per cent each in Tier 2 and Tier 3 cities. Currently, UPI adoption varies significantly across city tiers — 82 per cent of Tier 1 vendors accept digital payments, compared with 66 per cent in Tier 2 and 64 per cent in Tier 3.

Notably, only 52 per cent of surveyed street vendors had even heard of the proposed MDR framework, despite 67 per cent of them already accepting UPI payments. This awareness gap is compounded by a comprehension gap: among those who had heard of the MDR, 48 per cent in Tier 1, 46 per cent in Tier 2, and 33 per cent in Tier 3 incorrectly believed the charge would apply to them, even though the framework exempts small merchants receiving up to ₹1 lakh per month via QR-based payments.

Cost Pass-Through Risk and Regulatory Concerns

The survey also flagged a risk that vendors may attempt to transfer the additional cost burden to consumers. Some 30 per cent of Tier 1 vendors said they would pass the charge on to customers, compared with 14 per cent in Tier 2 and 19 per cent in Tier 3. The ISB researchers cautioned that such responses point to inadequate awareness of existing regulations that expressly prohibit merchants from adding MDR charges to customer bills.

Further, 10.4 per cent of vendors reported that their suppliers had already asked them to pay additional charges for UPI transactions in the 10 days preceding the survey — suggesting informal cost transfer may already be occurring in parts of the supply chain, ahead of any official implementation.

What the MDR Framework Proposes

Announced in September 2026, the MDR framework proposes a 0.4 per cent charge on UPI transactions above ₹2,000. Small merchants receiving up to ₹1 lakh per month through QR-based payments are exempt from the levy. Originally set for implementation on 15 October 2026, the rollout was postponed by the National Payments Corporation of India (NPCI) on 13 October until after the Diwali period. A revised implementation date has not yet been notified.

Supplier Payments and Threshold Exposure

The study highlighted that nearly 70 per cent of surveyed vendors make supplier payments exceeding ₹2,000 at a time, placing the bulk of their outgoing transactions squarely within the threshold covered by the proposed framework. This detail is significant: even vendors exempt on the receiving side could face MDR costs when making supplier payments, complicating the financial calculus for small businesses.

What Happens Next

With NPCI yet to announce a revised go-live date, the window remains open for further consultation. The ISB study's findings are likely to add pressure on policymakers to strengthen awareness campaigns and clarify exemption criteria before implementation. How the Centre and NPCI respond to these ground-level concerns will determine whether India's UPI penetration momentum — one of the most remarkable fintech success stories globally — is preserved or begins to reverse among small traders.