India moves to let UPI charge merchants after years of free transactions

India is taking steps to reshape the business model behind its Unified Payments Interface (UPI), a widely used payments network built by the government, via new legislation that could pave the way for merchants to pay charges on some UPI transactions. The legislation lays the legal groundwork for a potential overhaul of India’s zero-merchant-discount-rate (MDR) regime, under which businesses have not paid fees to accept UPI payments since 2020, when India scrapped merchant discount rates to accelerate adoption and instead relied on state incentives to fund the network.

The policy shift comes as UPI has become ubiquitous in India, processing a record 23.66 billion transactions worth ₹29.88 trillion (around $313.4 billion) in July alone, according to the National Payments Corporation of India (NPCI), the network’s operator. The proposal follows years of disagreement between the finance ministry, India’s central bank, and payment companies over how to fund the fast-growing network, as banks and fintech firms argued that keeping merchant payments free had become harder to sustain against climbing transaction volumes and infrastructure costs.

“For us to get to 90% penetration, and to take UPI global, startups, fintechs and banks will need to fund this expansion through continued investments in IT, innovation and cyber security,” Amrish Rau, chief executive of fintech firm Pine Labs, wrote on X, welcoming the move. He said letting the industry recover part of those investments from merchants, while keeping consumer and peer-to-peer payments free, would put UPI on a more sustainable footing.

The legislation does not itself impose merchant fees or specify which transactions would be affected, leaving those details for later. Still, analysts see it as a likely first step toward a significant new revenue stream: Jefferies estimated in a Tuesday report that merchant charges on higher-value UPI transactions could generate about $525 million to $1.05 billion in additional annual revenue by fiscal 2028, assuming a fee of 15-30 basis points. Indian daily Economic Times reported last month that officials were considering limiting any charges to larger merchants rather than applying them across all transactions — an approach Bernstein wrote last week would preserve UPI’s consumer-friendly model while creating a meaningful new revenue pool, noting that transactions above ₹2,000 (about $21) account for only about 4% of payment volumes but nearly 70% of transaction value.

The legislation will be closely watched by countries where UPI is now live, including Singapore, the United Arab Emirates, and France, and could be especially significant for Walmart-owned PhonePe and Alphabet’s Google Pay, which together account for nearly 80% of UPI transaction volumes, per NPCI data — though how much either benefits will depend on how any merchant fees end up distributed among banks, payment apps, and other participants.

Why it matters

If India moves from a free-for-merchants model to even modest transaction fees, it would reshape the economics for the banks, fintechs, and payment apps that built India’s dominant instant-payments rail — a model several other countries are now importing wholesale.