By – Suryaansh Gupta
Abstract
UPI is a convenient method of payment that India has now widely adopted. Payments are seamless, and are akin to cash transactions, except digital. This is significant from other digital methods, as users are generally required to pay charges on those methods, like debit cards . UPI is unique as there are no deductions for the consumer or the vendor throughout this process. However, UPI still requires significant costs for its architecture to function. The costs are currently majorly borne by the Government, with assistance from Banks. A long term solution for rising UPI costs could be found by charging major vendors for use of UPI, who gain significant value from this form of payment.
Introduction
Consider a regular transaction made thousands of times everyday across India. A customer scans a vendor’s QR code, pays forty rupees for a can of Diet Coke, and the payment clears almost instantly. Forty rupees are debited from the customer’s account, and forty rupees are credited to the vendor’s account. Nothing is deducted from either account.
The transaction feels instant because it is, but the instantaneous nature of the transaction also hides within its elaborate digital architecture. When a payment is made, the customer’s bank authenticates the request. The receiving bank processes the credit. An app like Google Pay carries the instruction, while NPCI’s switching infrastructure sends the message between participating banks. Fraud controls screen the transaction before authorisation. The vendor receives the funds immediately, although the actual transfer is settled separately through settlement cycles.
None of this is visible to consumers, and none of it is free to run. Since the system requires money to operate, and no money is charged from the consumer or the vendor, its costs have to be borne by someone. This is the paradox at the centre of India’s Unified Payments Interface: the system appears free to use, but costs considerable money. When users are not obligated to pay for maintaining this infrastructure, the question is whether UPI can sustain itself at its current scale or whether it is becoming a quietly accumulating liability that nobody has formally agreed to bear.
Why free pricing was, for a long time, the right call
Debit card transactions in India usually carry a Merchant Discount Rate, which is the fee that the merchant pays to the bank or payment processor for processing the transaction, subject to regulated ceilings that vary by merchant turnover, and can go up to 0.90%. Ordinary UPI merchant payments, however, have carried zero MDR since January 2020, following amendments to the Payment and Settlement Systems Act, 2007 and the Income-tax Act, 1961.
Although zero MDR prima facie seems like a long-term oversight ignored for short term growth, it has been instrumental in widespread adoption of this form of payment. When new forms of payment emerge, the problem of adoption is due to a stalemate between consumers and vendors. Customers adopt a system only once enough merchants accept it, while merchants accept it only once enough customers use it. Removing the cost for both was the fastest and most reliable way to break that standoff.
The sheer scale UPI has since reached in such a short period of time proves that this decision paid off. In FY2025–26, it processed approximately 24,162 crore transactions worth close to ₹314 lakh crore, a thirty percent increase in volume over the previous financial year. It accounted for roughly 85% of India’s digital payment volume, while person-to-merchant payments represented 63% of UPI transactions by volume in the first half of 2025. Since UPI was launched in 2016, these figures show how it took less than a complete decade to solidify this form of payment as second nature.
Where the cost actually went
The government pays a share of this cost directly. For FY2024–25, the government budgeted ₹1,500 crore so that banks could receive an incentive of 0.15 percent on UPI payments up to ₹2,000 made to small merchants. Banks and payment apps share this amount. Large merchants, and any payment above ₹2,000, get zero-cost UPI too.
This is where the problem lies. There is no difference between a small shopkeeper who would rather stop using UPI than pay MDR, and a huge company who would gladly pay MDR in order to make payments more convenient for its users. Both of them do not require the same support, but the service is still free for both of them. Industry estimates from the Payments Council of India suggest that running and growing UPI actually costs around ₹10,000 crore every year, a figure more than 6 times higher than what the government scheme covers.
Part of this cost, however, is covered by banks. They are willing to incur expenditure on UPI, as they believe those costs are recovered by keeping customers engaged with loans, deposits and other banking products. Similarly, payment apps such as Google Pay spend heavily on servers, customer support, cybersecurity and fraud prevention, but earn almost nothing from the transaction itself. They have started monetising themselves by leaning on other income sources like lending, insurance and advertising. Additionally, the consumers unknowingly contribute too, through the taxes that fund government incentives, and through whatever service quality an underfunded system can offer. In short, the QR code isn’t really free, its cost has simply been moved elsewhere.
Why the arrangement is becoming harder to sustain
This arrangement has kept the UPI system afloat so far, but UPI’s scale makes it harder to simply absorb this cost. The risk of UPI eventually not working is unlikely, as it is an extremely convenient form of payment more economically stimulating than any alternative. The problem is that without any direct revenue, banks and payment apps have less incentive to invest and improve the infrastructure beyond the bare minimum required by regulation or competition. They still have reasons to keep UPI running, but nothing clearly decides who should pay for better uptime, stronger complaint systems or new fraud protections.
Why free UPI is still worth defending
As of now, UPI behaves less like a private product and more like public infrastructure – similar to roads or currency systems. It can stay free at the point of use because its benefits go far beyond any single transaction: it cuts down cash costs like printing and handling, makes transfers easier, brings more people into formal payments, and gives small businesses a digital track record that can help them access credit, and makes consumers more likely to spend that money, as it feels easier to spend.
Charging ordinary consumers would risk undoing the habit that has made UPI so widely used. Charging small merchants could make low-value payments unprofitable, pushing people back toward cash or encouraging misuse of personal QR codes for business. What makes the forty-rupee transaction work so well is exactly that neither the customer nor the vendor has to think twice about whether the payment method is worth using.
A more durable settlement
A better long-term solution would treat different users differently, rather than applying one rule to everyone. Ordinary UPI payments made by individuals from their bank accounts should stay free. Small merchants and low-value transactions should keep their protection, backed by steady, multi-year government funding tied to clear goals like uptime, complaint resolution and reach into underserved areas.
Large merchants and high-value business transactions are a different matter. A big retailer, airline or e-commerce platform gains real value from fast, reliable digital payments and doesn’t need the same subsidy as a small vendor. A modest, regulated fee for clearly defined large merchants would ask these bigger beneficiaries to contribute, without changing UPI’s inclusive nature for everyone else. Such a system would need clear rules based on merchant turnover, checks against businesses misusing personal accounts, and safeguards against splitting large payments into smaller ones to dodge the fee.
Payment providers should also be allowed to charge openly for extra services for things like analytics, business integrations, soundboxes, fraud protection or custom settlement options. What should be avoided is a system where the core payment stays technically free, but merchants are quietly pushed into unclear bundles just to keep the business viable.
Conclusion – Returning to the transaction
None of this needs to change the transaction we started with. The customer should still pay forty rupees. The vendor should still receive the full amount. That remains a genuine achievement of Indian digital policy over the past decade. However, someone still has to pay for the banks, the switching systems, the fraud checks and the settlement processes that make that transaction reliable.
UPI doesn’t have to stop being free public infrastructure. What can’t continue indefinitely is the idea that its underlying costs can stay hidden, informally shared and politically unresolved forever. The real choice isn’t between a free UPI and a paid one. It’s between letting banks, taxpayers and investors quietly absorb a cost nobody has agreed to, or building an open system that keeps access free for most people while clearly deciding who pays for the network that makes it all possible.
About the Author
Suryaansh Gupta is a fourth-year law student at Jindal Global University and a member of the Economics and Finance Cluster of Nickeled & Dimed. He is an avid reader and a problem solver. He also is deeply passionate about aviation and politics (which sometimes overlap).