India’s UPI fee overhaul: What’s changing and why it matters

But after six years of free usage, regardless of transaction size or type, India has decided to begin charging merchants a 0.4% fee on payments above 2,000 rupees ($21) — the Merchant Discount Rate (MDR) — with certain exemptions, while person-to-person transfers will remain free.

Shares of Indian payments companies climbed on Wednesday as investors viewed the MDR as a new source of revenue for banks and payment firms that have so far shouldered the cost of processing these transactions.

HOW BIG IS UPI?

In August, UPI handled 24.5 billion transactions worth 29,823 billion rupees, serving more than 550 million users, official figures show.

UPI accounts for 84% of India’s digital payments by volume and represents 49% of global real-time payment volumes, the government said on Tuesday.

Walmart’s PhonePe and Alphabet’s Google Pay together commanded around 80% of UPI transaction value in August.

WAS UPI ALWAYS FREE?

When it launched in 2016, UPI included a nominal pricing structure that was temporarily waived in 2017 after India demonetised a significant portion of its high-denomination banknotes.

In 2020, all fees were eliminated, ushering in a zero-MDR regime that is due to end on October 15, 2026.

WHAT FEE WILL BE IMPOSED?

A charge of 40 basis points will apply to merchant transactions above 2,000 rupees, with carve-outs for small merchants and those operating in rural or semi-urban areas. High-usage categories such as telecom, railways, and mutual fund or stock investments will face lower fees.

Fees will be capped at 300 rupees on transactions above 75,000 rupees.

WILL CONSUMERS PAY THE FEE?

Although the National Payments Corporation has said merchants cannot directly pass the fee on to consumers, critics worry the cost will ultimately be reflected in prices.

Merchants pay the fee to the banks that process the transactions, with a share also flowing to payment apps such as Google Pay and PhonePe that enable these payments.

WHAT CRITICISM DOES IT FACE?

India’s opposition Congress party has criticised the move, with leader Rahul Gandhi arguing the fees will increase the burden on consumers as merchants transfer the cost.

Social media users have also raised concerns that the change may push merchants to favour cash, questioning why charges are being introduced for what the government has previously described as “digital public infrastructure.”

WHY DOES UPI NEED THE MERCHANT DISCOUNT RATE?

India’s government, central bank and payments authority say the MDR is needed to make UPI financially self-sustaining, support expansion in rural and semi-urban areas, and ensure that the vast majority of payments remain free.