The Bill That Could Finally Put a Price on India's Free Payments
India's Unified Payments Interface handles more money than most countries' entire GDPs. And for six years, nobody charged anyone to move it.
That's about to change.
A new piece of legislation introduced last week lays the legal groundwork for ending the zero-merchant-discount-rate (MDR) regime that has defined UPI since January 2020. It doesn't impose fees yet. It doesn't say which transactions would be affected. But the signal is unmistakable: free has been the strategy, and free is no longer sustainable.
The numbers are staggering. In July alone, UPI processed 23.66 billion transactions worth ₹29.88 trillion—roughly $313.4 billion—according to the National Payments Corporation of India (NPCI), the body that runs the network. India scrapped merchant discount rates on UPI to accelerate adoption, banking on state incentives to keep the lights on. It worked. UPI hit 2 billion transactions per month by 2020, the fastest payment product to ever reach that milestone since its launch in August 2016.
But keeping something this big free forever has a cost. And banks and fintech firms have been making that case for years.
Why Free Can't Last Forever
The argument is straightforward. As transaction volumes exploded and infrastructure costs climbed, the economics of a completely free network stopped adding up. The finance ministry, India's central bank, and payment companies have been circling this problem for years. Now, legislation gives them cover to actually act.
Amrish Rau, chief executive of fintech firm Pine Labs, put it bluntly on X. "For us to get to 90% penetration, and to take UPI global, startups, fintechs and banks will need to fund this expansion through continued investments in IT, innovation and cyber security," he wrote. Rau's position: let the industry recover part of those investments from merchants while keeping consumer and peer-to-peer payments free. That's the framing that's sticking.
UPI's architecture is deceptively simple. Users link a bank account, create a virtual payment address (VPA)—something like user@bankname—and transact via QR codes or VPAs. The system leverages Immediate Payment Service (IMPS) and Aadhaar-enabled infrastructure under the hood, but consumers just see speed. Two-factor authentication. Biometric verification. Transaction confirmations in seconds. The RBI mandates strong authentication, sets dispute resolution frameworks, and has been encouraging banks to educate customers on safe practices. It's robust. It's also expensive to run at this scale.
What the Numbers Say About Fees
Here's where it gets interesting for anyone tracking the payments ecosystem.
Jefferies published a report estimating that introducing merchant charges on higher-value UPI transactions could generate an additional ₹50 billion to ₹100 billion, roughly $525 million to $1.05 billion, in annual revenue by fiscal 2028. That assumes fees in the 15 to 30 basis point range.
Indian daily the Economic Times reported last month that officials were considering limiting any merchant charges to larger merchants rather than applying them across all transactions. A Bernstein report published last week reinforced that logic: transactions above ₹2,000 (about $21) account for only about 4% of payment volumes but nearly 70% of transaction value.
Charge the high-value transactions. Leave the small ones free. That preserves UPI's consumer-friendly model while creating a meaningful new revenue pool for banks and payment companies. It's a compromise that makes sense, at least on paper.
The legislation doesn't specify any of this. It doesn't impose fees. It doesn't define thresholds. It simply creates the legal authority for the government and NPCI to do so later. That's by design, rushing into specifics before the ecosystem has had time to absorb the shift would be reckless.
Who Wins, Who Loses
How any merchant fees ultimately get distributed will determine winners and losers. Walmart-owned PhonePe and Alphabet's Google Pay together account for nearly 80% of UPI transaction volumes, according to NPCI data. They're the duopoly. They'll feel any fee structure most directly.
But banks matter too. The issuing bank verifies credentials and checks balances. The acquiring bank credits the payee. The payment service provider, PhonePe, Google Pay, Paytm, Amazon Pay, WhatsApp Payments, facilitates the interface. NPCI routes everything. Each player has a stake in how the pie gets sliced.
Take PhonePe's sponsor banks, for instance: Yes Bank, ICICI, and Axis. Google Pay runs through Axis, ICICI, HDFC, and SBI. Paytm uses ICICI. WhatsApp Payments routes through ICICI. BHIM, NPCI's own app, operates under @upi. The ecosystem is interdependent. A fee structure that benefits one segment at the expense of another could create friction across the board.
There's also UPI 2.0 to consider. The newer iteration introduced overdraft facilities, one-time mandates for subscription services, invoice-sending capabilities, signed QR codes, multi-account linking, biometric authentication, enhanced transaction limits, and bill-sharing features. All of that development requires ongoing investment. The question is whether merchant fees on higher-value transactions will actually flow back into the ecosystem that built them, or whether they'll simply become another revenue line for banks already profitably servicing the network.
What This Means Beyond India
The legislation will be closely watched by countries where UPI is now live: Singapore, the United Arab Emirates, France, Bhutan, Mauritius, Nepal, and Sri Lanka. India's experiment with free digital payments at scale is unprecedented. So is the potential pivot to a fee-based model for merchant transactions.
If India can introduce merchant charges without eroding adoption, if the Bernstein analysis holds and consumers keep scanning QR codes while merchants absorb reasonable fees, it could become a template for other nations building real-time payment systems. France already has UPI. Singapore has it. The UAE has it. The question is whether they follow India's lead or double down on the free model.
What Comes Next
Nothing changes today. The legislation creates authority; it doesn't impose anything. No fees. No thresholds. No timelines.
But the direction is clear. Six years of state-subssidized free payments are giving way to a model where merchants, particularly larger ones, may eventually contribute to the infrastructure that serves them. That's not inherently bad. It's just different.
Whether that transition happens smoothly depends on the details yet to be written. How fees get structured. Which transactions get charged. How revenue gets distributed across banks, PSPs, and NPCI. How consumer behavior responds.
The bill is the first step. The hard part comes after.
