India ends UPI's free ride for merchants on larger payments

India has put a price on larger transactions over its ubiquitous digital payments network, ending years of free processing for merchants. The country’s Unified Payments Interface (UPI) will impose a 0.4% merchant fee on certain payments above ₹2,000 (about $21) starting October 15, the National Payments Corporation of India (NPCI), which operates the network, said Tuesday; consumers will continue using the service for free. By comparison, credit card merchant fees typically run 1.5% to 2.5% per transaction, while debit card fees are capped at 0.9%, according to an NPCI FAQ.

UPI’s merchant fee is capped at ₹300 (about $3) for transactions of ₹75,000 (around $783) or more, while payments of ₹2,000 or less stay free for merchants, and small merchants receiving up to ₹100,000 (about $1,041) a month through UPI are exempt entirely. Railways, telecom, insurance, and fuel will pay a flat ₹5 (about 5 cents) fee on UPI transactions above ₹2,000, and capital-market transactions will draw a 0.02% fee capped at ₹300, NPCI said.

The shift follows India’s move in August to amend its payments law to allow merchant fees on some UPI transactions, after scrapping merchant fees entirely in January 2020 to boost adoption and subsidizing banks and payment firms for the free processing since. UPI has since become the backbone of India’s digital economy, processing 24.51 billion transactions worth ₹29.9 trillion (about $312 billion) in August alone, per NPCI data, with industry estimates putting the annual cost of running the network — including server capacity, fraud prevention, and technical support — at about ₹200 billion ($2.1 billion). NPCI did not respond to questions about how it arrived at that estimate, how much revenue the new fees will generate, or how that revenue will be split across the ecosystem; it has said the funds will support infrastructure, cybersecurity, fraud prevention, and customer service, including a planned fund for digital-payment infrastructure in smaller cities and rural areas, with details to be worked out with India’s central bank over the next three months.

Krishnamurthy Subramanian, a former chief economic adviser to the Indian government, argued UPI should be treated as digital public infrastructure whose benefits extend beyond individual transactions. “The right question is: what is the opportunity cost of charging UPI transactions and what are its social benefits?” he wrote on X. NPCI noted that payments of up to ₹2,000 account for more than 95% of UPI merchant transactions by volume, and merchants will not be allowed to pass the new fee on to customers.

Why it matters

Fintechs including Paytm and Pine Labs, plus IPO-bound PhonePe and Razorpay, stand to gain revenue as the fee is distributed across the ecosystem, but the real test comes once fees take effect and merchants decide whether to absorb the cost or steer customers toward other payment methods for larger purchases.