Unified Payments Interface (UPI) is one of the world›s largest real-time payment interfaces, which processed 23.6 billion transactions worth Rs29.9 lakh crore in July. It is an innovation that India has been proud of ever since it came into existence – recognised by the IMF as the world’s largest real-time payment system. Of late, however, opinion was divided on a move to remove the existing legal provision that prevents banks and payment service providers from charging a fee, known as the Merchant Discount Rate (MDR), on notified electronic payments. The discussion comes amid reports of international pressure and concerns raised by global card payment companies that have seen their dominance challenged by India’s home-grown digital payment network. However, following Parliament’s approval of amendments to the Payment and Settlement Systems Act, 2007, there are reports of the government acknowledging that the law will apply only to transactions above a certain threshold.
If and when applicable, MDR will relate only to applying at a nominal rate – far lower than the MDR charged on debit or credit card transactions. Any merchant service charges, if introduced, would be commercial arrangements between merchants and payment service providers and would not directly translate into consumer charges. It is said that the objective is to create a revenue stream for banks, payment service providers and payment infrastructure companies without undermining the widespread adoption of UPI. Industry voices have argued that the present system is unsustainable, that a payments business cannot keep processing billions of rupees in transactions every month for free forever.
Will a small fee on usage of UPI matter? From the populist perspective, the answer is yes. The success of UPI has been built on a simple promise: instant payments that are free for ordinary citizens and small merchants. That model has helped drive an extraordinary shift away from cash and positioned India as a global leader in digital payments.
But look at the mechanics and economics of UPI’s functioning. Every time someone scans a QR code to pay a vegetable vendor, a cab driver or a large retail chain, that transaction moves seemingly through UPI at zero cost to everyone involved. But someone still pays for the plumbing. Banks, NPCI (the body that runs UPI) and payment apps such as Paytm, PhonePe and Google Pay all bear real costs, along with the cost of technology, infrastructure, customer support, fraud and risk management, to move that money instantly and securely.
But there can be no free lunches – and that too forever. The Digital India Programme completed 11 years on 1 July, marking a major milestone in India’s digital transformation journey. As of February 2026, India has signed MoUs with 24 countries for co-operation on India Stack and Digital Public Infrastructure (DPI) systems, covering digital identity, payments, data exchange, and service delivery. UPI is now live in over eight countries, including the UAE, Singapore, France, Mauritius and Sri Lanka, strengthening India’s global fintech presence. Can all this come for free? If India wants to be a role model fintech, service providers have to charge a fee (howsoever small). That is how a free-market economy works.
In this context, it will be instructive to look at the numbers involved. UPI P2M (person-to-merchant) transactions above Rs2,000 make up only about 4 per cent of volumes but 67-70 per cent of transaction value, based on NPCI data. A 15 bps MDR on P2M transactions above Rs2,000, according to analysts, could unlock a revenue pool of nearly Rs8,300 crore.
Nobody expected a blanket zero MDR. Every analyst view converged on the same design: fees confined to P2M transactions, with small merchants and low-value payments exempted, mirroring the precedent already set by MDR on RuPay credit cards routed through UPI. Even at 30-40bps, UPI would remain the cheapest payment rail in India, well below debit cards and a fraction of credit card costs. The challenge lies in developing a sustainable business model that can support the future growth of UPI. There is a fundamental issue. We don’t have a sustainable business model for UPI to keep it growing to the billion people and the kind of size we want it to be until user charges are introduced.