Unified Payments Interface (UPI) has been one of the strongest enablers of India’s digital commerce’s exponential growth. Consumers and merchants adopted it for its simplicity. And payment platforms, in turn, used rewards and cashback to build habits around it. Advertising gradually entered that ecosystem too, with payment-linked offers becoming a familiar part of brand promotions.
But now, a new cost is entering the equation. The introduction of a 0.4% Merchant Discount Rate (MDR) on specified merchant UPI transactions above ₹2,000 puts a price on a part of the payment activity that brands and platforms have long treated as a relatively low-cost route to conversion. The charge is borne by merchants, while transactions below the threshold remain outside the new levy. For marketers, the question is less about whether UPI will remain relevant and more about whether the UPI brands will change their marketing stand and henceforth how brands will evaluate the marketing built around it.
Mihir Mehta, Managing Partner, 0101.Today, does not expect cashback and payment-linked offers to disappear. Instead the economics behind them will come under greater scrutiny. Until now, the near-zero direct cost of UPI for merchants made payment-linked promotions easier to justify. Now, the brands and platforms will have to establish whether an incentive is creating an additional sale or simply subsidising a transaction that would have happened anyway.
That could change what the offer itself looks like. Mehta expects brands to move away from blanket cashback towards incentives ‘tied to a new user, a high-value basket, a specific merchant category, a repeat-purchase objective or a defined loyalty behaviour rather than being offered universally.’ He adds, “The marketing question changes from ‘Can cashback drive adoption?’ to ‘Can this incentive create enough incremental value to justify both the reward and the transaction cost?’”
This matters more for high-value purchases. On a ₹5,000 transaction, a 0.4% MDR amounts to ₹20. Add ₹100 cashback, and the merchant is no longer looking at the cashback alone. Across millions of transactions, that additional cost can become significant. The struggle for marketers, therefore, is whether cashback is driving a new transaction or simply subsidising one that would have happened anyway. That is particularly relevant given cashback’s role in UPI’s growth, from Paytm’s acquisition push during the demonetisation years to Google Pay’s scratch cards propositions.
But the market has moved way ahead of the stage of simply building a habit. UPI processed 2,366 crore transactions worth ₹29.9 lakh crore in July 2026 alone. At that scale, the commercial question is no longer about payment adoption. It is about the value of the transaction taking place through the payment rail.
And that is where Saurabh Sankpal, Co-founder & CCO, Re: Awakening Collective, sees the next change. In his view, the first phase of UPI growth was funded heavily by app-led rewards. MDR introduces a revenue stream linked to larger transactions, giving payment platforms a different basis on which to fund and sell incentives.
His expectation is that cashback will move ‘up the basket’. A ₹300 grocery order does not carry the same logic as a ₹40,000 smartphone purchase, where a 0.4% fee would amount to ₹160. Electronics, travel and festive shopping could therefore see more payment-led offers, particularly where card EMI and instant-discount offers already compete. “The cashback gets smaller in count and larger in value. The spray-and-pray reward that paid users to open an app will fade. The targeted, co-funded offer at checkout will grow,” Sankpal says.
The other change could be who pays for the offer. Sankpal points to the existing model where brands fund card-linked discounts and expects a similar arrangement to emerge with UPI apps. Brands and merchants could co-fund offers, with payment platforms using part of their MDR income to support them. This could bring UPI apps into the same promotional mix as banks during events such as Big Billion Days and the Great Indian Festival.
Nonetheless, The new MDR does not necessarily make UPI a less attractive payment option. Harshit Arora, Founder & CEO, Growster, argues that merchants have long absorbed payment costs associated with other instruments, particularly credit cards, where charges can be considerably higher. From that perspective, he does not expect the 0.4% charge to fundamentally alter how brands use UPI.
Arora believes merchants are likely to absorb the UPI cost, as they already do with other payment methods, rather than pass it directly to consumers, at least in the near term. Over time, he expects businesses could factor the cost into pricing in less visible ways. For now, he does not see the charge significantly altering marketing strategies. “I don't think it's going to change drastic marketing strategies or discount mixes,” he says.
His argument introduces another dimension to the debate: the size of the fee matters as much as the fact that there is a fee. If the cost remains materially below what merchants already accept for other payment methods, the incentive to move consumers away from UPI remains limited. What may change more immediately, he suggests, is consumer awareness of payment economics, because the introduction of the charge has brought a cost that was previously largely invisible into public discussion.
The bigger change, however, may happen inside the payment apps themselves. PhonePe, Google Pay and Paytm can link advertising with the point of payment and, importantly, with the transaction that follows. Sankpal believes MDR could strengthen this proposition, allowing platforms to use transaction data to target relevant consumers and track whether an offer leads to a purchase. This could move UPI from being simply a payment infrastructure to a performance channel that can link advertising directly to sales.
Jay Bhanushali, Founder, Acture Media, sees the implication is that the evaluation framework changes even where the channel does not. “Offers will now be judged like paid media, on acquisition cost and repeat value. The era of cashback as a volume game is over. It's now a targeting game,” notes.
Arnab Mitra, Founder and MD, Liqvd Asia, takes a sharper view of what the change could expose in existing marketing strategies. He argues, “Cash-back was never a loyalty strategy. It was a bribe dressed as a benefit.” If brands have been relying on discounts to keep customers coming back, the new cost could force them to look at whether they are buying retention at the expense of their margins.
For Mitra, the approach should be moving beyond simply rewarding the act of payment. He expects brands to explore more value-added experiences at the point of purchase, rather than continuing to use discounts as the primary reason for consumers to transact. he says. That could also put pressure on brands to rethink where the cost eventually sits. Mitra expects some businesses to pass it on to consumers, although not necessarily as a clearly stated UPI charge. Instead, the cost could find its way into pricing or other fees. The bigger concern, he suggests, is whether brands will allow payment incentives to become a substitute for a stronger retention strategy.
This is where the difference between using UPI as infrastructure and using it as a marketing tool becomes important. “The MDR debate is really a mirror. It will show you which marketing teams actually had a strategy and which ones just had a budget,” Mitra reckons.
There is also a practical risk in the threshold itself. Sankpal points to the possibility of merchants attempting to split bills or encourage customers to use personal QR codes to remain below ₹2,000. Sankpal expects D2C brands selling products around ₹2,199, for instance, to examine whether pricing a product at ₹1,999 changes the economics of the transaction. Such workarounds could undermine trust and invite scrutiny, making the design of legitimate offers more important than simply finding ways around the threshold.
For payment platforms as well, the new revenue stream could also reshape competition. Sankpal expects PhonePe and Google Pay to use their scale to build merchant programmes, while Paytm could leverage its merchant network. Newer players that rely heavily on cashback may face greater pressure.
Therefore, the economics of UPI may have changed, but how far that change will travel into marketing remains to be seen. Will brands rethink cashback and payment-linked offers, or will the relatively low cost of UPI keep them largely unchanged? As merchants and platforms adjust to the new model, its real impact on marketing will become clearer over time.
