Honeymoon Over: What’s Changing with UPI, and Why Now?

Last week, Finance Minister Nirmala Sitharaman introduced legislation in Parliament to amend Section 10A of the Payment and Settlement Systems Act, 2007, allowing the government to charge a merchant fee on UPI transactions.

The proposed changes raise concerns about financial inclusion, business costs, competition, innovation and the future of what has been billed as India’s most visible and successful digital public infrastructure, the Unified Payments Interface.

Since its inception in 2016, UPI has emerged as the first choice for everyone from street vendors and kirana stores to e-commerce marketplaces and large retailers seeking to make or receive digital payments. It has made instant payments inexpensive, interoperable and widely accessible. In 2025-26, an estimated 242 billion transactions worth ₹314 trillion were processed through UPI.

There are few parallels to UPI’s success. It has empowered millions of Indians, augmented productivity and generated significant savings by reducing dependence on cash transactions. Yet, the government has not explained why it wants to alter the character of UPI as a public good, the cost of which ought to be met from the taxes it collects rather than through a user fee.

In a clarification issued on Saturday, the finance ministry said the government intends to keep small merchants and person-to-person transfers free of any user charges.

To be sure, the proposed amendment does not specify a fee or identify any category of users the government plans to charge. It merely seeks to create an enabling legal framework that would allow the government to impose fees later.

That is where the problem lies. It would leave bureaucrats and administrative departments to decide who will be charged, when, and at what rate, without having to seek Parliament’s approval.

If the government intends to charge only transactions above a certain threshold and keep the fee nominal, as the finance ministry’s press note suggests, why not guarantee that in law by making it part of the amendment? Otherwise, doubts about the government’s intentions will remain.

The Viability Case
The core argument in favour of charging a fee is that it would help ensure the financial viability of the UPI system over the long term.

UPI’s rapid growth has created substantial costs for banks, payment service providers, technology platforms and the National Payments Corporation of India, which manages the real-time routing infrastructure. Banks incur costs in processing transactions and maintaining servers, while payment platforms such as Google Pay and PhonePe spend on cloud infrastructure, fraud detection, dispute management, customer support and compliance.

Under a zero-fee model, much of these costs are borne by the government directly or through incentives.

There are no firm estimates of how much it costs to keep the UPI system running. As the chairman of the State Bank of India has said, it is difficult to ascertain costs that are spread across multiple layers. The direct financial cost, or subsidy, borne by the government is estimated at around ₹20 billion annually, while at least twice that amount is believed to constitute hidden costs.

As UPI transactions grow at an exponential pace, with volume growth estimated at 30% last financial year, it is argued that relying on government subsidies will become fiscally and operationally difficult. On this reasoning, introducing a merchant fee is being presented as a justifiable step.

There are limits to that argument, however.

What the Reserve Bank of India saves on printing currency notes because of UPI could offset much of the subsidy the government pays to keep the system running. And this is only one of the many hidden benefits, or externalities as economists would call them, that could offset the direct and indirect costs of running UPI.

There is also a question about how much revenue a merchant fee would actually generate.

The finance ministry has said that person-to-person transfers and transactions below a certain threshold, expected to be around ₹2,000, would be exempt from any fee. Person-to-person transfers account for 37% of all transactions but 71% of the value transacted, suggesting that their average value is significantly higher than person-to-merchant transactions.

Person-to-merchant transfers account for 63% of UPI transaction volume but only 29% of value. According to official data, the average ticket size of 96% of all person-to-merchant transactions in 2025-26 was below ₹2,000.

If the government maintains its stated position, therefore, what remains available to be charged amounts to a little over 1% of the total value of UPI transactions. That figure would shrink further if small businesses below a specified turnover threshold are also exempted.

Is it then worth altering UPI’s zero-fee model?

It would be, perhaps, only if the government were eventually to go back on its assurance and progressively expand the applicability of the fee. That is precisely why the proposed legislation’s silence on the quantum and applicability of any fee matters. Rather than specifying these limits in law, it seeks to create an enabling framework that would authorise the executive to act later.

There are others who suggest that the proposed legislation could be the result of American pressure. American card companies such as Visa and Mastercard have long sought a fee on UPI payments as their business in India has come under pressure. The Indian government’s proposal is therefore being seen by some as a concession to the US aimed at expediting the India-US trade deal.

Who Pays
For consumers, there would be no direct impact if the government sticks to its assurance. But they could still face indirect effects. Some merchants may seek to pass on the fee through higher prices or nudge customers towards alternative payment methods, including cash.

Small merchants could be particularly affected. UPI’s zero-fee model has helped millions of micro and small businesses digitise without having to invest in expensive payment infrastructure. At a time when they are battling intense competition from large retailers with deep pockets and operating on thin margins, even a small fee matters.

Banks, payment platforms and fintech companies, on the other hand, stand to benefit from a fee. But they too face risks if the proposed changes weaken UPI’s open and interoperable character. They could lose customers, deposits, lending opportunities and platform stickiness.

Even large merchants, e-commerce companies and organised retailers with the capacity to absorb the cost of a user fee may begin exploring preferential arrangements with other payment platforms.

The biggest risk, however, is the erosion of trust.

UPI’s popularity and success rest substantially on the public perception that it is free, simple and universally accepted. Altering any of those attributes changes not merely the economics of UPI, but the compact on which its extraordinary adoption has been built.