The New Cost of UPI
For years, UPI's biggest advantage was that it was free for both users and merchants. This zero-cost model fuelled its explosive growth. However, to ensure the long-term sustainability of the payment ecosystem, a change is here. Starting October 15, 2026,
a Merchant Discount Rate (MDR) of 0.4% will apply to many person-to-merchant (P2M) UPI transactions above ₹2,000. While consumers are not meant to be charged this fee directly, it fundamentally alters UPI's 'free' tag for businesses. This MDR is capped at a maximum of ₹300 for transactions worth ₹75,000 or more, making it significantly cheaper than credit card fees for very large payments but introducing a cost nonetheless.
How Cards Fund Their Rewards
This brings us to credit cards. Ever wondered how banks can afford to give you reward points, cashback, and lounge access? The answer lies in the very same MDR. When you swipe your card, the merchant pays a fee to their bank, which typically ranges from 1.5% to 2.5%. This is significantly higher than the new UPI charge. A portion of this MDR is used by your bank to fund your rewards program. In essence, the cost is built into the price of goods and services, and a part of it is returned to you as a reward. This system is what allows card companies to build elaborate loyalty programs, something UPI's low-cost structure has not traditionally supported.
The High-Value Battleground
While the standard UPI limit is ₹1 lakh per day, it is enhanced to ₹5 lakh for specific categories like hospital bills and educational fees. This covers many large payments. However, credit cards often offer higher single-transaction limits and, more importantly, a different value proposition. For a large purchase, like a ₹1 lakh television, the new UPI MDR for the merchant would be capped at ₹300. If you paid by credit card, the merchant might pay an MDR of ₹1,500 to ₹2,500. While the merchant prefers the UPI payment, the credit card user might earn 1,500-2,000 reward points (worth anywhere from ₹300 to ₹1,500 depending on the card and redemption), get an interest-free credit period of up to 45 days, and have the option to convert the purchase into EMIs.
Cards Lean into Their Strengths
This is where cards can create a compelling structure for larger payments. For high-value transactions, the allure of UPI's speed diminishes, and factors like rewards, insurance, and credit become more important. Card issuers can design products that offer accelerated reward points, bonus miles, or instant discounts specifically for purchases above a certain threshold, like ₹50,000. They already do this with milestone benefits, rewarding users for crossing annual spending limits. Furthermore, co-branded cards with airlines, hotels, or large retailers offer benefits that a simple payment network cannot match. The value is not just in the payment, but in the entire ecosystem built around the card.
A Split Decision for Consumers
The future likely isn't a case of one system winning over the other, but of consumers making strategic choices. For everyday payments below ₹2,000, UPI will remain the undisputed king due to its simplicity and zero cost. For mid-range payments between ₹2,000 and ₹50,000, a new battleground is emerging where users will weigh the convenience of UPI against the potential rewards of a credit card. A recent survey showed that if merchants pass on the new UPI fee, a significant number of consumers would consider switching to cards or even cash for these larger payments. For very large, planned purchases, the bundled benefits of credit cards—from EMIs to travel points—present a powerful incentive structure that UPI, in its current form, cannot replicate. The choice will depend on the transaction size and what the user values more: zero-cost simplicity or reward-driven value.
