India is contemplating a significant shift in the operational framework of its Unified Payments Interface (UPI) by introducing merchant fees on certain transactions. This move aims to establish a sustainable business model for the nation’s rapidly expanding digital payments network.
UPI, launched in 2016 by the National Payments Corporation of India (NPCI), has revolutionized digital transactions in the country. By July 2026, it processed a record 23.66 billion transactions worth approximately ₹29.88 trillion (around $313.4 billion), underscoring its pivotal role in India’s financial ecosystem.
In January 2020, the Indian government eliminated merchant discount rates (MDR) on UPI transactions to accelerate adoption. This policy shift meant that businesses could accept UPI payments without incurring fees, with the system’s operational costs being offset by state incentives. However, as transaction volumes have surged, the sustainability of this model has come under scrutiny.
Financial institutions and fintech companies have expressed concerns about the escalating infrastructure costs associated with maintaining and expanding the UPI network. They argue that reintroducing merchant fees, particularly on higher-value transactions, could provide the necessary funds to support ongoing investments in technology, innovation, and cybersecurity.
Amrish Rau, CEO of fintech firm Pine Labs, emphasized the need for continued investment to achieve broader penetration and global expansion of UPI. He suggested that allowing the industry to recover part of these investments from merchants, while keeping consumer and peer-to-peer payments free, would place UPI on a more sustainable trajectory.
The proposed legislation does not specify the exact structure or rates of potential merchant fees, leaving room for future policy decisions. Analysts predict that implementing fees on higher-value transactions could generate substantial revenue for the payments industry. For instance, introducing a fee of 15–30 basis points on transactions above ₹2,000 (about $21) could yield an additional ₹50 billion to ₹100 billion (approximately $525 million to $1.05 billion) annually by fiscal 2028.
Reports suggest that officials are considering applying these fees primarily to larger merchants, thereby preserving the cost-free nature of UPI for small businesses and low-value transactions. This approach aims to balance the need for a sustainable revenue model with the goal of maintaining widespread adoption among diverse user groups.
As UPI continues to expand internationally, with operations in countries such as Singapore, the United Arab Emirates, and France, the outcomes of India’s policy adjustments will likely influence global digital payment strategies. The legislation’s impact will be particularly significant for dominant players in India’s digital payments market, including PhonePe and Google Pay, which together account for nearly 80% of UPI transaction volumes.
Introducing merchant fees on UPI transactions represents a pivotal moment in India’s digital payments landscape. While it addresses the pressing need for a sustainable business model, careful implementation will be crucial to ensure that the benefits of UPI remain accessible to all segments of society. Balancing revenue generation with inclusivity will determine the long-term success and scalability of this initiative.
