India is moving to rewrite the business model for the UPI instant payments network through new legislation that could pave the way for fees on some transactions made by merchants. The legislation does not impose direct fees, nor does it yet specify which types of transactions will be affected, but it lays the legal foundation for a possible review of the zero merchant discount rate system in place since January 2020.
Under this system, businesses do not pay fees to accept UPI payments, a policy India adopted to accelerate the network’s adoption. Instead of merchant fees, the network’s operation and development have relied on government incentives, as transaction volumes and infrastructure costs have risen.
A Broad Network and Rising Costs
UPI has become an essential part of India’s payments ecosystem. According to data from the National Payments Corporation of India (NPCI), which operates the network, UPI processed a record 23.66 billion transactions during July, with a total value reaching 29.88 trillion rupees, or about $313.4 billion.
The legislative move follows years of discussions among the Finance Ministry, the central bank and payments companies over the best way to fund the rapidly growing network. Banks and fintech companies believe keeping merchant payments free has become more difficult as the investment required in infrastructure increases.
Amrish Rau, chief executive officer of fintech company Pine Labs, said in a post on X that reaching 90% adoption and expanding UPI globally will require startups, fintech companies and banks to continue investing in information technology, innovation and cybersecurity. He added that allowing the sector to recover part of these investments from merchants, while keeping consumer payments and person-to-person payments free, could make the UPI model more sustainable.
Potential Revenue from Higher-Value Transactions
Market analysts believe the legislation could represent the first step toward a new revenue source for India’s payments sector. Jefferies estimated in a report published Tuesday that charging fees on higher-value transactions could generate additional annual revenue of between 50 billion and 100 billion rupees, or about $525 million to $1.05 billion, by fiscal year 2028, assuming fees of between 15 and 30 basis points.
The Economic Times reported last month that officials were considering restricting any fees to larger merchants, rather than applying them to all UPI transactions. According to a report by Bernstein, this approach could preserve the network’s consumer-friendly model while creating a new revenue source for banks and payments companies. The report noted that transactions worth more than 2,000 rupees, or about $21, account for only about 4% of total transaction volume but represent around 70% of their value.
Potential Impact on Major Players and Overseas Expansion
The legislation’s details will be closely watched in countries where UPI has become available, including Singapore, the United Arab Emirates and France. The change could also have a particular impact on companies that dominate India’s digital payments market; Walmart-owned PhonePe and Alphabet’s Google Pay together account for about 80% of UPI transaction volumes, according to NPCI data.
However, the extent to which the two companies or the rest of the ecosystem will benefit will not be determined until it is known how any future fees will be distributed among banks, payments applications and other parties. The legislation therefore opens the door to a potential change, but it does not yet announce effective fees or a timetable for implementing them.