End of free era for UPI: Here's what changes, what doesn't

Starting 15 Oct, UPI will introduce a capped merchant fee on transaction values above ₹2,000, while remaining entirely free for consumers and most small vendors. The policy shift provides a sustainable revenue model to upgrade digital infrastructure and align UPI with global payment standards.

From 15 October, Unified Payments Interface (UPI) merchant transactions move from a zero-fee structure to a modest, tiered one, a narrow change with wider implications for how India's payments system sustains itself. The standard fee is 0.4%, applied to person-to-merchant payments above ₹2,000 and capped at ₹300 beyond ₹75,000. Railways, telecom, insurance, fuel, and a few other essential categories pay a flat ₹5 instead, while capital market transactions carry a lower 0.02%, also capped at ₹300. Consumers pay nothing, and transfers between individuals remain free as before. Small and micro merchants are already exempt. Vendors receiving up to ₹1 lakh a month through UPI QR codes stay at zero fee, and this covers more than 95% of all merchant transactions by volume. So, the new fee touches only a small, higher-value slice of commerce, not the everyday retail most Indians associate with UPI.

For most users, this change may not be noticeable in daily life. Everyday spending at local vendors, on transport, and on small retail purchases remains free, exactly as they were before this announcement. The rule is explicit that merchants cannot pass this fee to customers, and payment applications are barred from introducing platform charges of their own. The more interesting impact could be indirect. A revenue stream for the payments ecosystem could create more room for new products around UPI, including richer credit options, buy-now-pay-later products at merchant points, and merchant-funded rewards. At the same time, higher-value transactions, EMIs, large retail purchases, and sizeable business-to-consumer payments will carry a cost for merchants, even though they cannot recover it directly from customers. Whether this cost finds its way into pricing over time is a question worth watching, though the current framework does not permit merchants to recover it directly.

Government estimates, citing industry figures, put the cost of running UPI's infrastructure, its servers, fraud detection systems, and bank-side support, at close to ₹20,000 crore a year. Some of this has so far been covered through a government subsidy meant to be temporary, not permanent. A fee gives the payments industry its own revenue line, one that could eventually fund better fraud detection, faster settlement, and merchant tools that don't yet exist at scale. There is also a comparative point worth noting. Card networks globally already pair free or low-cost consumer access with a commercial layer on the merchant side, and several major payment systems abroad follow a similar pattern. Seen this way, the shift places UPI closer to a more established international structure rather than marking a significant departure for the system.

The fee also raises concerns that are difficult to dismiss. Though it is capped at 0.4%, it could introduce friction at a point when digital payment habits are still forming for a large number of smaller merchants across the country. Some may look to offset the cost through pricing, through cost repackaging, or by leaning on cash for larger transactions, undercutting the very adoption this system was designed to encourage. A fair question remains about how the thresholds and category exemptions were arrived at, and whether they were tested widely enough with the merchants who will live with them. A fee introduced to strengthen a system only earns its keep if merchants can see, and use, what it eventually funds.

This also reopens an older debate. Should India revisit the idea of a rival to NPCI? In 2021, several industry consortia sought a licence for a New Umbrella Entity (NUE) to operate alongside NPCI. The initiative was shelved in 2023, with regulators citing a lack of innovative proposals. A key constraint then was economic, since a competing system had no revenue model of its own. MDR changes that. A recurring fee on UPI transactions offers the kind of monetization that was missing before, making a renewed attempt more plausible than in 2023. Whether it happens will likely depend less on appetite and more on whether a new entrant can meet the same bar that regulators set previously, that is, genuine innovation rather than a parallel version of what already exists.

The broader significance of this move lies less in the fee itself and more in what it signals about how public digital infrastructure eventually sustains itself. Most analysis suggests UPI can absorb a 0.4% fee without meaningful disruption to its scale or adoption. The more consequential question is what this revenue is used for. Stronger fraud protection, faster settlement, and better tools for merchants would make this a natural next step in UPI's evolution. Without those visible returns for the merchants and institutions funding them, the case for this shift may be harder to make going forward.

Adhil Shetty is the chief executive officer of BankBazaar.com