UPI Charges Explained in Payment Gateway: MDR vs. Platform Fees

The prevailing narrative suggests that UPI is a free service. For consumers and peer-to-peer transfers, this is largely true. However, for merchants, the settlement report often tells a different story. If you’ve wondered why a “Zero MDR” government initiative still results in fees on your payment gateway (PG) dashboard, you are likely misunderstanding two distinct costs.

To manage your business finances effectively, it is essential to distinguish between MDR (Merchant Discount Rate) and Platform Fees. These represent two different charges for two entirely different services.

Breaking Down the Difference: MDR vs. Platform Fee

What is MDR?

MDR is the network-level charge paid to the participating banks and the National Payments Corporation of India (NPCI) to facilitate the actual movement of funds through the banking ecosystem.

• UPI (Bank Account): For standard savings account transfers, the Government of India mandates a 0% MDR.
• UPI (RuPay Credit Card): Because this involves a credit risk and a 45-day interest-free period for the user, a standard MDR applies (typically between 1.1% to 2%).

What is a Platform Fee?

A Platform Fee is the fee you pay to a payment gateway provider like Razorpay to manage the transaction lifecycle. While the money moves via UPI, Razorpay provides the infrastructure to ensure that the move is successful, secure, and recorded. This covers:

• High Success Rates: Utilizing dynamic switching to route transactions through the most stable bank servers.
• Fraud Detection: Real-time security monitoring to prevent chargebacks and unauthorized access.
• Automated Reconciliation: Instantly matching payments to order IDs so you don’t have to check bank statements manually.
• Optimized UI/UX: Features like “UPI Intent” that reduce customer drop-offs.

Understanding the Two Scenarios of UPI

Scenario A: UPI via Bank Account

• MDR: 0%
• Platform Fee: Applicable

The merchant pays only for the technology used to process the payment, not for moving money. This aligns perfectly with the government’s intent, which is UPI as a public digital utility, supported by private innovation.

Scenario B: UPI via RuPay Credit Card

• MDR: ~1.1%–2%
• Platform Fee: Added on top

The total cost is higher because the merchant is accepting credit, even though the interface is UPI. In other words, this is not “regular UPI”; it’s a credit card transaction disguised as UPI for user convenience.

UPI Charges on Razorpay Payment Gateway

When using Razorpay to accept UPI, the total cost deducted from your settlement is determined by the specific instrument the customer uses within their UPI app. Razorpay differentiates between a standard bank transfer and a credit-based transaction to ensure compliance with NPCI mandates while covering the technical overhead of the gateway.

Scenario A: UPI via Bank Account

For a standard transaction where a customer enters their UPI PIN to move money directly from their savings or current account, the MDR is 0%. Razorpay applies a standard platform fee of 2% (plus 18% GST). This fee is not for the movement of money but for the infrastructure, dashboarding, and security provided by the gateway.

Scenario B: UPI via RuPay Credit Card

When a customer uses the UPI interface to pay via a linked RuPay Credit Card, the financial nature of the transaction changes. Because the bank is extending credit, an MDR of approximately 1.1% to 2% is applied by the network. Razorpay’s platform fee for this specific method is 2.15%. This reflects the increased complexity of managing credit-based settlements and higher security protocols.

How the Processing and Settlement Workflow Functions

To understand how these charges appear on your settlement report, consider a merchant selling a product for ₹1,000.

1. Selection: The customer scans your Razorpay QR or uses the Checkout and selects “UPI.”
2. The Instrument:
   • If they pay via Bank Account: The MDR is ₹0. The platform fee is 2% (₹20). Your gross settlement (before GST) is ₹980.
   • If they pay via RuPay Credit Card: The MDR is roughly 2% (₹20). The platform fee is 2.15% (₹21.50). Your gross settlement (before GST) is ₹958.50.
3. The Technology Layer: During this process, Razorpay’s “Smart Routing” checks the health of the customer’s bank server. If the bank’s UPI server is down, Razorpay automatically reroutes the request through a secondary provider to ensure the transaction doesn’t fail.
4. Reconciliation: Once the payment is successful, the transaction is instantly logged in your Razorpay Dashboard, linked to the specific Order ID, and prepared for the next settlement cycle. You receive the funds minus the total of the MDR and Platform fees.

Why are RuPay Credit Cards on UPI treated differently?

A RuPay Credit Card transaction on UPI is fundamentally a credit card transaction, simply using the UPI interface (QR or UPI intent) instead of traditional methods like swiping. The process involves the bank lending money to the customer, offering up to 45 days of interest-free credit, and assuming the risk of default and fraud. This inherent risk is the basis for the Merchant Discount Rate (MDR) that must be applied.

Why merchants still accept it

The integration of RuPay Credit Cards on UPI is viewed by many businesses as a significant revenue driver rather than merely a cost. This is because enabling credit payment options directly influences customer behavior: customers tend to spend more when using credit compared to their bank balances, which directly leads to an increase in Average Order Value (AOV). Furthermore, the availability of a credit option on UPI improves conversion rates, particularly for higher-ticket purchases.

What “Zero Fee” Payment Gateways aren’t telling you

You might find payment gateways claiming “Zero UPI Fees.” This is where the “Hidden Math” comes in. Every payment gateway has massive costs for servers, security, and engineering. If they aren’t charging a transparent platform fee, they are usually recouping that money elsewhere.

Why the Platform Fee is often your best investment

• Success rate beats discounts – A gateway with lower fees but poor success rates quietly costs more in failed transactions. Higher success rates mean more completed payments and higher realized revenue.

• One API, many payment modes – A single API unlocks UPI, domestic and international cards, and pay-later options. Merchants spend less time integrating and more time scaling.
• Automated reconciliation is a game-changer – Automated reconciliation matches every Payment ID to its Order ID instantly. This removes daily manual checks and saves businesses 8–10 hours of accounting work each week

Conclusion 

UPI serves as a public good, whereas payment gateways are a premium infrastructure, making it a mistake to evaluate them by the same metrics. MDR is a measure of network cost, while a Platform Fee reflects the reliability of receiving business payments. Ultimately, smart businesses prioritize optimizing for Net Realized Revenue over simply seeking the cheapest fee.

Frequently Asked Questions 

1. Is UPI really free for all transactions? 

For customers and small peer-to-peer transfers, yes. However, for merchants, while MDR is 0% on bank-to-bank UPI, transactions made via RuPay Credit Cards and over ₹2,000 carry an interchange fee/MDR (usually around 1.1% to 1.99%), which the merchant must bear.

2. Why am I being charged for RuPay Credit Card payments on UPI?

Unlike a standard bank-to-bank UPI transfer, a RuPay Credit Card payment involves a credit limit provided by a bank. This attracts an MDR (Merchant Discount Rate) similar to a traditional credit card swipe to cover the costs of the credit cycle and insurance.

3. What is the difference between MDR and Platform Fees? 

MDR is the “network cost” paid to banks and NPCI to move the money. A Platform Fee (or Gateway Fee) is what you pay the provider, like Razorpay, for the technology, high success rates, security, and automated reconciliation tools.

4. Does the Merchant Discount Rate (MDR) for RuPay Credit Cards change based on my business type?

Yes. Unlike Bank UPI (which is $0%MDR across the board), the MDR for RuPay Credit Card on UPI is dynamic. It is calculated uniquely based on your business size and industry risk level. This is an industry-standard mandate that applies to every payment gateway.

Here is how the charges are structured:

By Business Size (Turnover):

• Small Businesses: If your annual turnover is up to ₹20 Lakhs, you pay a substantially lower (often 0%) MDR for transactions below ₹2,000. This is a government-backed incentive to help small vendors grow.
• Medium & Large Businesses: Any business with a turnover above ₹20 Lakhs is required to pay a higher, standard MDR on all RuPay Credit Card transactions, regardless of the amount.

5. Why are there separate charges for using a RuPay Credit Card on UPI when standard UPI transactions already incur a fee when paying via a payment gateway?

Merchants often confuse the interface with the instrument. While both use a QR code, a standard UPI payment is a “Push” from a bank account (Cash), while RuPay on UPI is a “Pull” from a credit line (Loan). Because RuPay Credit Card involves a bank lending money to your customer for 45 days, the banks charge an MDR (Merchant Discount Rate) to cover that risk. Razorpay clears the confusion by showing you the split: the Government-mandated 0% MDR applies only to Bank Transfers.

Merchants often confuse the interface with the instrument. While both use a QR code, a standard UPI payment is a “Push” from a bank account (Cash), while RuPay on UPI is a “Pull” from a credit line (Loan). Because RuPay Credit Card involves a bank lending money to your customer for 45 days, the banks charge an MDR (Merchant Discount Rate) to cover that risk. Razorpay clears the confusion by showing you the split: the Government-mandated 0% MDR applies only to Bank Transfers. For RuPay CC, you are essentially accepting a Credit Card, and the pricing reflects that reality.