UPI succeeded by making digital payments as easy as cash. A tea seller can receive Rs 20 instantly, without finding change, counting notes or paying a fee. In FY2026, 55.5 crore Indians made 24,162 crore UPI transactions worth Rs 314 lakh crore — about 91% of India’s GDP.
Free payments were central to UPI’s success. That will change for many businesses. From October 15, they will have to pay a fee called the Merchant Discount Rate (MDR) on UPI receipts above Rs 2,000.
The government may delay the fee by a few months to avoid the festive season. But whenever introduced, it will weaken UPI, raise prices and create difficulties for businesses of all sizes.
Why impose the fee? The government says it is needed to run UPI safely and expand the system. But banks, payment apps and the government all benefit from UPI. Why make users pay instead of asking these three to share the cost?
Banks save money when customers move from cash to UPI. They spend less on handling and transporting cash and need fewer branches and ATMs. They also have the financial capacity to support the system. Over the past decade, Indian banks have written off an average of about Rs 2 lakh crore in bad loans annually. Institutions operating at this scale can share UPI’s relatively low running costs.
Payment apps gain customers, data and opportunities to sell financial products. PhonePe and Google Pay operate in a UPI market serving more than 55 crore Indians. Transaction-level spending data can help them develop AI-driven services and offer loans, insurance and mutual funds. PhonePe’s valuation of about $10 billion reflects, among other things, UPI’s importance to its business. Free payments create business opportunities even without charging for every transaction.
The government also benefits and can contribute. Last year, it spent Rs 2.03 lakh crore on food subsidies, Rs 1.68 lakh crore on fertiliser subsidies and Rs 22,800 crore on agricultural credit. Funding UPI alongside banks and payment apps is within its means. Another option is an annual network-access fee of $100 million for payment platforms handling more than 30% of UPI transactions.
UPI can therefore be funded in several ways while keeping it free for users. Why are these options not being explored? The role of US commercial interests in India’s payment systems deserves attention.
The US trade representative’s 2026 National Trade Estimate Report on Foreign Trade Barriers criticised Indian digital payment rules as favouring domestic providers and sought a level playing field for US payment suppliers. This agenda serves two groups: the card companies, Visa and Mastercard, and the payment apps, Walmart-linked PhonePe and Alphabet’s Google Pay.
Visa and Mastercard stand to gain from UPI losing its cost advantage. Free UPI allows merchants to receive the full payment without a processing fee. Charging MDR reduces that advantage and makes cards more competitive. The card companies also seek the same UPI access that RuPay enjoys. The National Payments Corporation of India (NPCI) allows RuPay credit cards to link to UPI for credit payments of up to Rs 2,000 through QR codes.
PhonePe and Google Pay could earn MDR revenue while retaining their market dominance. Together, they handle more than 80% of UPI transactions. The NPCI introduced a 30% market-share limit in November 2020 but has repeatedly delayed enforcement. The current deadline is December 31, 2026. Enforcement would require PhonePe to cut its share by about 15 percentage points and Google Pay by five. The USTR report raises concerns about this ceiling, which would limit their dominance. India should resist pressure to delay enforcement again.
Free UPI lets merchants receive the full payment without a fee, making it cheaper than credit cards. Banks and payment apps could easily share UPI’s running costs and keep it free, but that would not help Mastercard and Visa. Instead, charging merchants MDR reduces UPI’s cost advantage, making Visa and Mastercard more competitive. It could also generate revenue for PhonePe and Google Pay. These two benefits to US firms weaken the UPI and explain why merchants are being asked to pay instead of banks and payment platforms.
The claim that fees are needed to fund UPI overlooks other funding options. The actual cost of running the system remains unclear. The NPCI cites an industry estimate of Rs 20,000 crore a year but provides no detailed breakdown of expenses or what each stakeholder pays. An independent audit should review this estimate before it is used to justify charging merchants. It must also account for the savings and the business opportunities UPI creates for banks and payment platforms.
UPI fees could affect everyone: consumers, farmers, small businesses, workers, and exporters.
Exempting payments below Rs 2,000 will not protect small purchases. Shopkeepers may recover fees on larger bills by raising prices across products. A customer buying a Rs 10 item in cash could therefore pay more.
Fees also build up along the supply chain before goods reach shops. Farmers, processors, wholesalers and retailers may pass UPI charges to the next buyer. These costs become part of the final price. The 18% GST on fees adds another burden for small businesses unable to claim tax credit.
The one lakh monthly UPI receipts threshold is low. At a 20% profit margin, these sales leave only Rs 20,000 to support a family. Charging such businesses would squeeze their earnings. Vendors receiving business payments in personal accounts could also face fees after reclassification.
Higher prices would reduce households’ spending power. Businesses unable to raise prices would earn less. Weaker demand and lower earnings could reduce investment, hiring and jobs. Exporters could face higher input costs from UPI fees paid along the supply chain and lose competitiveness.
India should withdraw the proposed UPI fee and keep UPI free for all users. Based on independently audited operating costs, banks, payment apps and the government should share the bill through a transparent funding arrangement. Those unwilling to participate should be free to opt out.
India should preserve RuPay’s integration with UPI and enforce the 30% market-share ceiling for third-party payment apps without another extension.
It should treat dependence on foreign-controlled payment and technology networks as a national-security priority. Visa and Mastercard suspended services in Russia when the war in Ukraine began. In July last year, Microsoft abruptly suspended services at Gujarat-based Nayara Energy. These disruptions expose the risks of foreign dependence. India should build domestic alternatives to keep essential services running during crises.
India should resist US pressure to weaken UPI and other domestic payment systems. Brazil’s defence of Pix despite US pressure and tariffs offers a useful lesson.
Ajay Srivastava is founder, Global Trade Research Initiative