When I wrote my master’s thesis on fintech and financial inclusion in India, my central claim about UPI was almost embarrassingly simple: it scaled because it was free at the point of acceptance. Not merely cheap but free.
Merchants paid nothing to receive a payment, so they had no reason to prefer cash. Remove that friction and adoption follows. From 15 October 2026, that assumption gets its first real stress test, because a Merchant Discount Rate returns to UPI: 0.4% on person-to-merchant payments above ₹2,000, capped at ₹300.
So today I decided to test my own thesis against the design, rather than defend it.
First, does behaviour actually change? My field interviews were unambiguous on one point: for the marginal merchant, acceptance cost is the decision variable. One small-business owner told me plainly he would “rather keep cash payments” than accept a rail that “diminished his margins.” Another said that without UPI he would be “stuck with POS machines and their extra fees on every payment” — the fee was the whole reason he switched. The uncomfortable implication is that MDR reintroduces precisely the variable that drove these merchants onto UPI in the first place. If acceptance cost swung them in, a non-zero acceptance cost can, in principle, swing some of them back — or at least back to nudging customers toward cash on larger tickets. That is the repercussion worth watching: not a collapse, but a quiet re-emergence of cash at the ₹2,000-plus boundary, and the gaming that a hard threshold invites.
Second, was Ozili right — or has the government out-thought him? My literature review leaned on Ozili (2018), who warned that digital finance turns regressive when profit-driven providers “employ marketing tactics that discriminate against low-income and poor customers by assuming they cannot afford associated fees,” and when providers retreat from high-risk rural areas. That was the trap. Read the MDR design against that warning and something striking emerges: it looks built to avoid exactly that trap. P2PM small merchants — street vendors, kirana stores — receiving up to ₹1 lakh a month keep zero MDR regardless of ticket size. Essentials like railways and fuel are capped at a flat ₹5. Person-to-person and sub-₹2,000 payments stay free, and the government estimates roughly 96% of merchant transactions are untouched. Where Ozili feared a fee that falls hardest on the poor, this framework carves the poor out of the fee almost entirely. Credit where the design earns it: this is a regressivity-aware policy, not a revenue grab dressed up as one.
So I will give the government its due — cautiously, which is the only way Ozili should ever be applied.
Now where it doesn’t earn credit. The ₹1 lakh exemption is an aggregate monthly ceiling, not a per-transaction one, and a merchant who breaches it for three consecutive months is reclassified to standard P2M. That creates a cliff, not a slope: the growing small merchant — precisely the one inclusion policy should reward — is the one who crosses into charges. A design that protects the smallest and taxes the next size up has a mild disincentive to grow baked into it. Ozili’s ghost is not fully exorcised; it has simply moved up one income bracket.
Third, and most interesting — will this become the case study in habit over price? Here I think the frictionlessness thesis gets partially rescued by its own success. My strongest interview quote came from a fintech executive: people would still invest without these platforms, but “would they be paying using their phones? I believe not.” Phone-based payment was the most habit-contingent behaviour I found. And yet another expert noted that platforms which “initially lured in customers with benefits” retained them after the benefits stopped — users stayed “eyeing the overall benefits.” That is the crux. MDR is merchant-side, and NPCI has barred apps from passing it to consumers, so the person tapping their phone feels nothing. Behavioural lock-in on the consumer side is now so deep that a merchant-side charge may simply be absorbed rather than resisted.
If that holds, UPI becomes a textbook demonstration that once a frictionless habit is entrenched at national scale, a small, well-targeted cost no longer dislodges it. My thesis said friction, or the lack of it, built the habit. The more precise claim, now, is this: frictionlessness built it, but the habit now outlives the friction. That is either a vindication of good policy design, or a warning about how much load-bearing weight we have placed on people simply being used to it. October will start telling us which.