New Delhi: India’s decision to introduce a fee on selected higher value Unified Payments Interface transactions is set to create a new source of revenue for banks and payment companies while raising questions about competition in the country’s fast growing digital payments market.
From October 15, merchants will pay a Merchant Discount Rate of 0.4 per cent on specified person to merchant UPI payments above ₹2,000. The fee will be capped at ₹300 for transactions of ₹75,000 or more.
The change will not apply to person to person UPI transfers. Merchant payments of up to ₹2,000 will also remain free. Small merchants receiving up to ₹1 lakh a month through UPI QR codes will remain exempt from the MDR.
The Finance Ministry has said that about 96 per cent of person to merchant UPI transactions will remain unaffected by the new system. It has also made clear that the Merchant Discount Rate is not a government tax or a charge collected by the National Payments Corporation of India. Instead, it will be distributed among participants in the payment ecosystem, including banks and payment application providers.
The government says the new framework is intended to support the continued operation and expansion of the UPI ecosystem, including investment in areas such as cybersecurity, fraud prevention, technology infrastructure and innovation.
The change comes as UPI continues to operate on a massive scale. According to NPCI data, UPI processed about 24.51 billion transactions worth ₹29.82 lakh crore in August. A total of 752 banks were live on the system during the month.
The new fee structure is particularly significant for companies that already handle a large share of UPI payments. PhonePe and Google Pay together accounted for about 80 per cent of UPI payment value in August.
Financial services firm Bernstein estimates that payment applications could generate up to $1.1 billion in annual revenue from the new fee by March 2028. Based on their existing market share, PhonePe and Google Pay could together receive about $900 million in annual revenue by March 2028, according to the estimate.
These figures are projections rather than confirmed future earnings. The actual revenue will depend on transaction volumes, the value of eligible payments and how the market develops after the new system begins.
The new revenue model could also affect competition among UPI applications. The largest companies have already built extensive customer and merchant networks, meaning they could benefit substantially from their existing scale.
At the same time, smaller payment companies could gain a new reason to invest in UPI services. Industry representatives have suggested that smaller players may focus more on areas such as bill payments, business transactions and financial services to compete with the largest applications.
The impact on rural areas is another issue to watch. The government has said the new framework is intended to support the continued operation and expansion of the UPI ecosystem. Industry sources have also suggested that additional revenue could make expansion into rural areas more commercially viable for payment companies.
However, it remains unclear whether the new system will ultimately increase or reduce competition. NPCI has twice deferred a decision on imposing a 30 per cent market share cap on individual third party UPI applications. The current market concentration means the impact of the new revenue model will be closely watched.
For consumers, the government has stressed that there will be no direct UPI charge. Banks have been advised to ensure that merchants do not pass the Merchant Discount Rate on to customers, while UPI application providers have been prohibited from imposing platform fees on users.
The possibility of indirect costs is one issue that will be watched after the new system begins. Merchants could try to recover higher payment costs through their overall pricing, although such a response would not be the same as a direct UPI charge on customers.
The decision follows changes to India’s payment system law and NPCI’s September 15 announcement of the detailed MDR structure.
Certain sectors will have different rates. UPI payments above ₹2,000 for services including railways, telecommunications, insurance, fuel and agricultural inputs will attract a flat fee of ₹5. Payments related to capital market transactions will have an MDR of 0.02 per cent, capped at ₹300.
The new system therefore does not represent a general charge on UPI. It is a targeted change affecting selected higher value merchant payments.
Free UPI payments have played an important role in the expansion of digital transactions in India. The introduction of the Merchant Discount Rate marks a significant change in how some UPI merchant transactions are financed.
The immediate question is no longer whether UPI will remain completely free for every type of transaction. That has already been decided. The more important questions are how much revenue the new system will generate, how it will affect merchants and payment companies, and whether it will change the balance between dominant and smaller UPI applications.
Those effects will become clearer after the new fee structure takes effect on October 15.