Zero MDR on UPI, gaming ban and now re-KYC: Govt puts payment aggregators in a bind

Marred by wafer-thin margins and zero merchant discount rate (MDR) on UPI, payment aggregators such as Razorpay, Paytm, PhonePe and Cashfree are now burdened with re-KYC of all merchants under the new RBI Master Direction on Payment Aggregators (September 2025).

Under the new guidelines, PAs must complete re-KYC of all merchants by December 2026. This requires extensive manual effort to re-conduct KYC without disrupting business. For new merchant onboarding, extended KYC is mandatory, and the entire due diligence responsibility lies with the PAs. 

“This makes onboarding both tougher and slower, requiring PAs to scale up their KYC and compliance teams,” said one of the top executives of leading payments firms on condition of anonymity.

The new guidelines also mandate monitoring of suspicious transactions and filing reports with FIU-IND (Financial Intelligence Unit–India). On top  of this, PAs must conduct regular cybersecurity audits and share the reports with the Reserve Bank of India (RBI).

A risk head at a licensed PA told Entrackr that while adding re-KYC and new compliance requirements may look simple on paper, execution is far more complex. “There are lakhs of merchants to re-KYC, and following up is a huge challenge. The cybersecurity and FIU-IND reporting requirements demand large teams. The human effort is massive, and the cost of compliance is a major concern,” he explained.

As earlier, there is also a limit on the escrow account balance on which PAs can earn interest only on the defined “core portion,” not the entire balance.

As per the directions, RBI has allowed licensed PAs to expand into new business lines (e.g. an online PA launching physical POS services or vice versa) without a fresh license, simply by notifying RBI 30 days in advance. However, offline POS margins are razor-thin, and infrastructure investment is high, making this unattractive for most PAs.

Considering the RBI’s directions, the business model appears unsustainable for mid-sized and smaller PAs. A VC invested in licensed PAs told Entrackr on condition of anonymity, “With the gaming ban and the new guidelines, consolidation in the space is inevitable. Large PAs may survive on scale, but margins will remain under pressure.”

As per multiple media reports, margins of payments firms have already taken a significant hit because gaming contributed disproportionately high volumes and margins compared to other merchant category codes. 

According to the above-mentioned venture capitalist, acquisitions in the PA space will be purely driven by business merit: “It’s the same wrapper/technology across PAs. Apart from revenue, there is no moat or value that bigger players will see in smaller PAs,” he emphasized.

Besides ban on real money gaming, the second biggest issue for PAs is UPI, which dominates the market, while cards and net banking account for smaller volumes. “UPI’s zero MDR compounds the problem: PAs handle massive traffic without corresponding revenue. Maintenance and tech costs already make the business unviable for many,” said one of the analysts tracking the payment aggregators and gateways.

Some banks, including ICICI, have quietly started charging merchants a small fee on UPI transactions. Zero MDR has effectively been violated for a while, with banks labelling it as “tech fee” or similar, and charging select high-scale merchants. However, this MDR is not shared with PAs leaving them with almost no revenue from UPI.

The new master guidelines by the apex banking body impose stricter KYC, escrow, and compliance requirements, making it harder for over 30 licensed PAs to balance costs with shrinking revenues. For many, this raises the fundamental questions: is the PA business model sustainable anymore? will they find a sustainable model, or will the industry shrink through bloodbath and distressed consolidations?