Government has said that Unified Payments Interface (UPI) transactions will continue to be free for customers and the vast majority of transactions will also be free for merchants. The clarification comes at a time when there are increasing calls to charge on certain UPI transactions and the future of the Merchant Discount Rate (MDR).
UPI has become one of India's most popular digital payment systems that allow people to move money from one bank account to another in a matter of seconds using mobile phones. Since its launch, the platform has been instrumental for launching India's digital payments ecosystem (e.g., small businesses, retailers and everyday customers) and has been at the forefront of digital payments in India.
As UPI payments are not charged a transaction fee, the government is now in the clear position to respond to concerns that changes in the payment fee structure are likely to make UPI more expensive for consumers or small businesses.
For merchants, the situation is slightly more nuanced. While the government has said that most UPI transactions will be free, discussions are still ongoing on charging fees for certain types of transactions. Any pricing structure will be specific to the merchants in general rather than for the consumers or small companies, and therefore a lot of that kind of price remains to be decided.
The matter of Merchant Discount Rate (MDR) has been discussed since the government removed MDR on UPI and RuPay debit card transactions in 2020 to encourage digital payments. Banks, payment companies and fintech firms have since looked for sustainable ways to cover the costs of processing transactions and regulators have made digital payments accessible.
The problem of UPI's immense scale is especially important. Each day, millions of transactions take place from small purchases at local shops and small payments to large payments at organised retailers. Low-cost access to UPI has been one of the major reasons that led to its huge adoption in India.
The government’s latest statement therefore provides reassurance to consumers and small merchants that payment charges could return on a widespread basis. At the same time, the possibility of a differentiated fee structure for certain large merchant transactions could continue to be discussed as India looks for ways to create a sustainable financial model for the digital payments ecosystem.
For consumers, the immediate message is simple: UPI remains free for making payments. For businesses, the vast majority of transactions are also expected to remain free, although certain categories may be charged at some point in the future.
As UPI grows both in the country and abroad, policymakers will have to balance affordability, innovation and the financial sustainability of India’s digital payments infrastructure.
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