UPI may no longer be free: New law could let banks charge merchants

The Unified Payments Interface (UPI) has revolutionised digital payments in India, enabling instant bank-to-bank transfers without any cost to users. Since its launch in 2016, UPI has remained free for both customers and merchants, a key factor behind its widespread adoption. However, a new law introduced by the government seeks to change this model, allowing banks and UPI firms to charge merchants for certain categories of UPI payments. This has sparked concerns that the cost may eventually be passed on to the common consumer.

Under the current framework, banks and payment service providers bear the cost of processing UPI transactions. The government has encouraged banks not to levy any Merchant Discount Rate (MDR) on UPI, which is a fee that merchants normally pay for accepting digital payments. Instead, the government has provided incentives and subsidies to banks to compensate for the operational costs. This has made UPI one of the most affordable payment systems in the world.

The proposed law, which is part of broader amendments to the payment and settlement regulations, would permit charging a fee on certain types of UPI payments, particularly those made to merchants for goods and services. While the exact categories and thresholds are yet to be defined, sources suggest that the move is aimed at making the UPI ecosystem financially sustainable in the long run. Banks and payment companies have long argued that the absence of an MDR makes it difficult to recover their costs and invest in improving the infrastructure.

Consumer rights groups and small business associations have expressed apprehension about the proposed change. They argue that if merchants are charged for accepting UPI payments, many of them—especially street vendors, kirana stores, and small retailers—will either stop accepting digital payments or pass the fee to customers. This would undermine the government’s broader goal of financial inclusion and digital empowerment. Micro and small merchants, who rely on thin margins, could be particularly affected if the charges are not carefully calibrated.

The government, however, maintains that the new law is designed to be flexible. Officials have indicated that the charges would be applied only to larger merchants with a high volume of transactions, and that the government will retain the power to fix the ceiling on such fees. The Reserve Bank of India (RBI), which regulates the UPI ecosystem, is expected to issue detailed guidelines after the law is enacted. Experts say that the RBI’s approach will be crucial in ensuring that the change does not hurt the ubiquity of UPI.

Historical context matters here. When UPI was introduced, the government capped the MDR for small transactions on other modes like debit cards. For UPI, it chose to set the MDR at zero to encourage adoption. Over time, the volume of UPI transactions has grown exponentially, crossing 14 billion transactions a month. This has made the operational cost significant. The central bank, in several reports, has noted the need to review the pricing model, while also emphasising the importance of keeping UPI accessible.

For the average user, the immediate impact is likely to be minimal. Small-value transactions, such as paying for groceries or transferring money between friends and family, are expected to remain free. The law is likely to target business-related payments, especially those above a certain ticket size. Still, the ambiguity has led to anxiety among consumers and merchants alike. Many are waiting for clarity on how the government defines 'certain UPI payments' and which entities would be eligible to impose the charge.

The broader question is whether digital payments should be treated as a public good or a commercial service. India’s success with UPI has been globally recognised, and any step that increases the cost of using it could slow down the country’s cashless trajectory. On the other hand, a sustainable business model might ensure better service reliability, security, and innovation. The government’s challenge lies in striking a balance that protects millions of small users while allowing the industry to grow.

As the law proceeds through the legislative process, all eyes will be on the fine print. The central bank’s forthcoming guidelines will be the key to understanding how the new regime will operate. Until then, the only certain thing is that the era of completely free UPI for all may soon be drawing to a close.