India has introduced legislation that could allow merchant fees to return to its Unified Payments Interface (UPI), the country's government-built instant payments network.
The bill, introduced in India's parliament, sets out the legal groundwork for revising the country's zero-merchant-discount-rate (MDR) policy, under which merchants have not paid fees to accept UPI payments since 2020. The National Payments Corporation of India (NPCI), which operates UPI, continues to record rapid growth in transaction volumes, a trend that has intensified debate over how to fund the network's ongoing expansion.
Industry pressure for a new funding model
According to the announcement, the proposal follows years of disagreement between the finance ministry, India's central bank, and payment companies over how to sustain UPI's infrastructure costs. Banks and fintech companies have argued that keeping merchant payments free has become increasingly difficult to maintain as transaction volumes and associated costs have grown.
Amrish Rau, chief executive of fintech company Pine Labs, said that reaching 90% penetration and expanding UPI internationally would require startups, fintech companies, and banks to fund that expansion through continued investment in IT, innovation, and cybersecurity. It was also added that allowing the industry to recover part of these investments from merchants, while keeping consumer and peer-to-peer payments free, would help place UPI on a more sustainable footing.
The legislation itself does not impose merchant fees or specify which transactions would be affected, leaving those details to be defined at a later stage.
Potential revenue impact
Market analysts see the legislation as a possible first step toward a new revenue stream for India's payments industry. In a report published on Tuesday, Jefferies estimated that introducing merchant charges on higher-value UPI transactions could generate an additional USD 525 million to USD 1.05 billion in annual revenue by fiscal year 2028, assuming a fee of 15 to 30 basis points.
Indian daily Economic Times reported last month that officials were considering limiting any merchant charges to larger merchants rather than applying them across all UPI transactions. Bernstein, in a report last week, said such an approach would preserve UPI's consumer-friendly model while creating a new revenue pool for banks and payment companies. The brokerage noted that transactions above USD 21 account for about 4% of payment volumes but nearly 70% of transaction value.
International and market implications
The legislation will be watched closely by countries where UPI already operates, including Singapore, the UAE, and France.
The outcome could be particularly relevant for companies that dominate India's digital payments market. PhonePe, owned by Walmart, and Google Pay, owned by Alphabet, together account for nearly 80% of UPI transaction volumes, according to NPCI data. How much either company ultimately benefits will depend on how any merchant fees are eventually distributed among banks, payment apps, and other participants in the ecosystem.
