India to Introduce Merchant Fees on UPI Payments, Sparking Debate Over Digital Public Good

India’s unified payment interface (UPI), the world’s largest real-time digital payment system, will soon impose fees on merchants for the first time, marking a significant shift from its zero-cost model. Starting next month, merchants accepting UPI payments exceeding 2,000 rupees ($20.84) will be charged a rate of 0.4%, with a cap of 300 rupees per transaction for amounts above 75,000 rupees. The decision by the National Payments Corporation of India (NPCI) has ignited a fierce debate across the country.

The government defended the policy change, arguing it will not hinder India’s progress toward a cashless economy. However, critics have questioned the move, noting that UPI was previously designated as a “digital public good” offered free to all users. Prime Minister Narendra Modi’s political rivals have alleged that the pricing adjustment is a concession to pressure from the United States.

Under the new framework, person-to-person UPI transactions will remain free of charge. The NPCI emphasized that the new merchant discount rate (MDR) remains substantially lower than fees for other card-based payments, which range from 0.9% for debit cards to 1.5%-2.5% for credit cards.

Fintech giants have largely welcomed the introduction of the fee. Girish Krishnan, director of payment experience at Amazon Pay, stated that the notified MDR framework preserves UPI’s foundation of zero-cost adoption for consumers and small businesses. Kunal Shah, head of Meta’s WhatsApp Pay, described the change as a “great move forward,” while Paytm noted it would generate additional revenue from its merchant services.

India eliminated UPI merchant fees in 2020 to encourage digital adoption. The strategy proved highly effective, with transaction values surging tenfold to 213 trillion rupees by January 2025. The World Bank had previously praised UPI for making digital payments feel instant, universal, and free at the point of use—a perception that is now changing.

Skeptics, including former BharatPe CEO Ashneer Grover, have labeled the levy as mere tax collection. The opposition Indian National Congress accused the government of favoring American firms, claiming the policy extracts money from Indian pockets to benefit U.S. companies like PhonePe, Google Pay, and Amazon. Some analysts warned that the fee could drive consumers back to cash transactions.

The policy change follows scrutiny from the U.S. Trade Representative’s office, which earlier this year raised concerns that India’s electronic payments ecosystem appeared to favor domestic suppliers over foreign ones, citing restrictions on American participation in credit transactions and the RuPay network.

Market experts suggest that despite ending its free status, UPI’s new fee structure still offers a competitive advantage over traditional card networks. Neil Shah of Counterpoint Research noted that the 0.4% rate severely undercuts credit and debit card fees, providing merchants with strong economic incentives to continue using UPI.

Data from U.S. brokerage Ambit Capital indicates that while transactions above 2,000 rupees represent only 4% of merchant payment volumes, they account for approximately 67% of total transaction value. The report estimates the fee could unlock up to 245 billion rupees ($2.5 billion) in revenue for the sector, benefiting dominant platforms like PhonePe and Google Pay, which together handle nearly 85% of UPI transaction value.

In other economic news, India’s retail inflation rose to 4.82% in August from 4.45% in July, marking a tenth consecutive monthly increase and adding pressure on the central bank to raise benchmark rates. Meanwhile, Prime Minister Modi stated that border peace is essential for bilateral relations with China, as ties between the two nations continue to thaw following years of diplomatic strain.