Daybreak - UPI can be forever or free—not both

Episode Date: August 14, 2025

On 19 March, the Indian government slashed incentives for UPI transactions by more than half to Rs 1,500 crore for FY25.After it launched in 2016, UPI very quickly became the backbone of India’s digital economy–thanks to demonetisation, and well, the pandemic. Most importantly, it was the radical decision to keep it free that fuelled its growth. No merchant fees. No transaction costs. But the zero-MDR policy came at a price because payment processors lost more than 2500 crore last year alone. And with the new budget cut, it will get worse.The system is clearly showing signs of strain.While UPI continues to post record volumes—18 billion transactions in March alone—many are asking an uncomfortable question:Can India keep up its digital payments miracle without letting the infrastructure collapse under its own weight?Tune in.Do you think people will stop using UPI if there is a small fee involved?*This episode was originally published on 21st April, 2025. Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

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It's not very often that a government creates a widely successful tech platform only to quietly start good drawing support later. But that's what seems to be happening with UPI, India's flagship digital payment system. On the 19th of March, the Indian government slashed incentives for UPI transaction actions by more than half to 1,500 crore rupees for the financial year 2025. Now, that is a huge drop from previous years. So is it then a signal that the era of generous subsidies might be coming to an end? Probably.

You see, UPI was never just a payments platform. After it was launched in 2016, it very quickly became the backbone of India's digital economy, thanks to demonetization and, well, the pandemic. And also the radical decision to keep it free, no merchant fees, no transaction costs. But that zero MDR or merchant discount rate policy came at a price. Payment processors lost more than 2,500 crore rupees last year alone. And with the new budget cuts, that hole is only getting bigger.

The system seems to be showing signs of. of strain. So while UPI continues to post-record volumes, 18 billion transactions in margin, many in the ecosystem are asking an uncomfortable question. Is this model still sustainable? Can India maintain its digital payments miracle without letting the infrastructure collapse under its own weight? Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nekda Sharma, and I don't chase the new cycle. Instead, every day of the week, my colleague Rahal Philipos and I

will come to you with one business story that is worth understanding and worth your time. Today is Monday, the 21st of April. Nearly 107 billion. That is how many UPI transactions were made between individuals and businesses in just one financial year,

2024. A staggering number, no doubt, but look beneath the surface, and it's clear that something is not adding up. Because even as these volumes grow, the system that supports it is crying for help. So let us start with the basics. There are two types of UPI transactions,

merchant transactions and peer-to-peer or P-2-P, like when I pay my landlord rent or when someone pays their tuition fee. Most of the merchant transactions, which is over 85% actually, were under 500 rupees. Now, that brings the average merchant transaction to around 636 rupees. Now, compare that to peer-to-peer payments where the average value is about $2,744.

You see, there is an imbalance. It is this low-value, high-volume pattern that is creating a structural problem for UPI. The government, through the National Payments Corporation of India or NPCI, has spent years nurturing UPI as a public digital utility. But growing that network, which involves reaching to more customers, onboarding more merchants, is not free. It costs money. For every successful UPI transaction, NPCI charges a switching fee of 50 pesos.

That goes to the banks and wallets for facilitating the payment. And then there is a 0.15% fee that banks charge digital wallets when users top up their balances. Add those up across billions of transactions and you will realize that it is a heavy bill. But who is paying this bill? No one really. The government was helping out, providing annual incentives to banks and service providers to cover these costs. But that support is slipping. In the financial year 2025, the government slashed its UPI subsidy from 5,500 crore rupees to just 500 crore

rupees. Now, you cannot call that just a trim, which is why it leaves the entire ecosystem staring at a widening financial gap. In FY 2024 alone, that gap between what it costs to run UPI and what could realistically be recovered from merchant fees was at least 6,000. And remember, that is before subsidies. Now, the industry is left with one option that no one actually wants, which is to bring back MDR or the merchant discount rate.

But let's be clear. This is not about charging consumers. It is about asking merchants to contribute a small fee per transaction. That is how most digital payments across the world work. That is how card networks like Visa, MasterCard have survived for decades. But in India, the idea of charging merchants has met with a lot of resistance. The fear is that any fee, however small, will push businesses and customers back to cash transactions. But is that fear valid? See, UPI is not new anymore. It's

no longer something that people just try. It's something that people depend on. And that didn't just happen because of government mandates. It happened because of private. players like phone pay, pay, paytm, and Google Pay, who made UPI seamless and accessible. These companies flooded the country with QR codes, 633 million, to be exact. They built the interfaces, handled the customer's service, and made it intuitive. They did all the hard work, and now they are still footing the bill. So it's only fair that the ecosystem finds a way to make this financially sustainable. and a smartly designed MDR policy could actually be the key.

Okay, so let's try to do the math. If all merchant transactions above 500 rupees were charged with a 1.1% fee when processed through wallets, and the rest processed through banks faced a 0.25 charge, the system could raise more than 36,000 crore rupees, and that is more than enough to plug the subsidy. gap. In fact, it could actually eliminate the need for government's support altogether. And the benefits would not just be financial. This kind of revenue stream could actually push competition. Banks and fintechs would have a reason to go after the UPI market more aggressively,

particularly into three towns and rural areas. This is where, you know, UPI has not reached its full potential. As of now, India has about 450,000, million unique UPI users. And around 350 million of them actively make payments. But thanks to financial inclusion efforts like Jan Dhan, there are millions more people with bank accounts just waiting to be brought into the system. So with a fee, banks and fintechs would be incentivized to serve these people, to build better services, to make onboarding easier and to improve infrastructure, because right now the cracks are starting to show. On 26th of March, UPI actually went down. There was a massive outage that left millions of people stranded. NPCI received almost

23,000 customer complaints. Now, this kind of a failure is not just inconvenient. It breaks trust, and it also means that the system clearly needs to be upgraded. And then there is also the issue of fraud. In FY 20204, online payment fraud shot up by 85% with losses exceeding 1,000 crore rupees. UPI, as we know, is not immune. In fact, we all know that it is a right target. To protect users, banks and wallets, they will need to invest in real-time fraud detection, cyber security teams and customer support. And none of this comes cheap. And then there's also the opportunity side of the equation. Introducing a fee could actually unlock features that merchants value, spend analytics, inventory tracking, financial management tools, multilanguage support like

what Beam 3.0 offers with access in 15 Indian languages. These are the kind of services that could make digital payments even more attractive to small businesses. Now, let's talk about credit. One of UPI's most promising frontiers is credit inclusion. Last year, total UPI linked credit line transactions hit 10,000 crore rupees. But here's a catch. Only 1 to 2% of that came from actual UPI credit lines. The rest was handled through rupe cards. Why?

Because there is no financial motivation for banks to push UPI credit lines. there is no revenue model. Fees could change that. Even with small income from merchant payments, banks could start offering more pre-approved UPI credit lines and crucially, they will be able to reward customers more fairly. Last year, banks came under fire for offering fewer reward points on rupe credit cards

used on UPI compared to traditional card payments. That disparity could disappear if there's money in the system to support it. But let's look at the other side of the argument. Many believe that any fee, no matter how small, will cause users or merchants to walk away. But that is a little bit like ignoring reality. Because UPI is already a habit, most people don't carry cash in cities anymore. Most merchants don't want to lose a sale. Even if a shop owner decides to pass on a $5-rupy charge to a customer,

that is unlikely to stop them from making a $500-purchase. and even less likely if that charge comes with some added value like a cashback or credit access. Ultimately, this comes down to one hard truth. UPI cannot remain free forever. In 2022, the finance ministry declared that there were no plans to levy charges on UPI services. But in the same breadth, they acknowledged that service providers would need to recover their costs through other means, quote-unquote, through other means.

The problem is that those other means haven't materialized. And as the ecosystem grows more complex and more essential to the economy, it becomes harder to justify why the businesses powering UPI, handling security, support, innovation are expected to operate on thin air. Charging a fair, transparent MDR is not about undermining UPI. it is about securing its future. Because without a sustainable revenue model, UPI might not just stop growing,

it could start breaking down. And no one. Us, merchants, banks, or the government can afford that. So the real question now is not if UPI should introduce merchant fees. The real question is, can it survive without it? And if that is a choice that we're facing, then maybe it is time to admit that even digital public goods need a business model.

That is all for today. Thank you for tuning in, dear listener, and I would love to hear your thoughts on this. Do you think people will stop using UPI if there is a small fee involved? Send me your answers as a voice note or as a text on WhatsApp. The number is 89711-08379. I'll repeat that again, 89711-08379.

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Today's episode was hosted by Snigda Sharma and edited by Rajiv CN.