India considers ending free UPI payments for big businesses

India is considering allowing banks and payment companies to charge merchants for using its Unified Payments Interface (UPI), as the government seeks a sustainable funding model for one of the world’s largest real-time payment networks after years of largely free transactions.

UPI, launched in 2016, has become a routine payment method for more than 550 million users and processes billions of transactions each month. In July, it handled 23.6 billion transactions worth about $313.5 billion, reports the BBC.

The system has largely been free for consumers and merchants, with the government subsidising the costs of maintaining the infrastructure, processing transactions and detecting fraud.

Under proposals being considered, banks and payment companies could levy a merchant discount rate (MDR) of about 0.3% to 0.5% on larger transactions at big businesses.

One proposal would apply charges to transactions above 2,000 rupees. Such transactions account for about 4% of UPI’s transaction volume but 67% of its total value, according to the information provided.

Person-to-person payments and transactions involving small merchants are expected to remain free under the proposals, helping protect the broad adoption that has driven UPI’s growth.

Seeking a sustainable model

Although UPI is free at the point of use, operating the network carries substantial costs, including servers, transaction settlement and fraud detection.

The Reserve Bank of India has indicated that a permanent funding mechanism will be needed. “Someone will have to pay the cost,” it has said.

Supporters of a pricing model argue that charging larger businesses could introduce what experts describe as “commercial sanity” into the system, allowing market participants to price risk more effectively and generate funds for critical infrastructure.

But any move towards charging merchants could create resistance among businesses that have helped make UPI ubiquitous.

Balancing cost and adoption

Research suggests even relatively small fees could discourage small and informal merchants, many of whom operate on narrow margins. Their willingness to adopt simple QR-code payments has been a major factor in UPI’s rapid expansion.

Consumer attitudes could also pose a challenge. A 2024 survey found that 75% of UPI users said they would stop using the service if transaction fees were introduced, raising concerns about how users would perceive a shift away from free payments.

If merchants become less willing to accept UPI because of additional costs, the network could also lose some of the frictionless experience that has been central to its success.

India’s challenge is therefore to create a funding model that supports the network without undermining its widespread use.

Brazil’s Pix system offers one possible precedent. It remains free for individuals while allowing low-cost charges for businesses, and has continued to rank among the world’s fastest-growing payment systems.

The next phase of UPI will depend on whether India can finance the infrastructure behind the network while keeping payments accessible to the millions of smaller and “marginal merchants” still entering the digital economy.