Seamless digital payments have a price / UPI and the cost of policy reversal

Why in the News

Parliament has passed the Taxation and Other Laws (Amendment) Bill, 2026, allowing a legal framework for possible charges on Unified Payments Interface (UPI) and RuPay debit card transactions. The debate centres on whether digital payments should remain free to promote inclusion or adopt a sustainable funding model.

What is UPI?

• UPI: Unified Payments Interface.
• Enables instant bank-to-bank payments through mobile applications.
• Operated by the National Payments Corporation of India (NPCI).
• Processed 23.6 billion transactions in July.

What is Merchant Discount Rate (MDR)?

• MDR: Merchant Discount Rate.
• A fee charged for processing digital payments, generally paid by merchants.
• Credit-card MDR: around 1-3%.
• Debit-card MDR: up to 0.9%.
• UPI has followed a zero-MDR regime since 2020.

What Does the 2026 Bill Do?

• Amends Section 10A of the Payment and Settlement Systems Act, 2007.
• Creates legal space for the government to notify charges on specified electronic payment modes.
• A proposed MDR of 0.25-0.5% has been discussed for UPI transactions above ₹2,000.
• This could cover about 5% of transactions by volume but around 65% by value.
• The government has stated that consumers and small merchants will not bear MDR and the final framework is yet to be decided.

Why is Zero-MDR Considered Unsustainable?

1. Infrastructure costs: Huge transaction volumes require continuous investment.
2. Fraud prevention: Cybersecurity and fraud-control systems require funding.
3. Government support: ₹8,730 crore was provided through incentives during 2021-22 to 2024-25.
4. Funding gap: This covered only a limited share of industry costs.
5. Market concentration: PhonePe and Google Pay together account for around 80% of UPI transactions.

What is a Two-Sided Market?

• A platform connecting two groups whose participation reinforces each other.
• UPI: Consumers ↔ Payment platforms ↔ Merchants
• More users attract more merchants, while more merchants attract more users. Therefore, imposing a charge on one side may reduce the network effect.

Why Could MDR Affect UPI?

Arguments for charges

• Provides sustainable revenue for infrastructure.
• Supports innovation and fraud prevention.
• May attract more competitors into the UPI ecosystem.

Arguments against charges

• Could discourage merchants and consumers from using digital payments.
• Intermediaries may absorb the cost rather than pass it on.
• Could weaken India’s financial inclusion and formalisation gains.
• May encourage a shift back towards cash.

About India’s Digital Payments Ecosystem

• RBI: Reserve Bank of India, the regulator.
• NPCI: National Payments Corporation of India, operator of major retail payment rails.
• Banks and fintechs: Participate as payment service providers.
• UPI: Real-time account-to-account payment system.
• RuPay: India’s domestic card payment network.

Statutory Framework

• Payment and Settlement Systems Act, 2007: Regulates payment systems under RBI supervision.
• Section 10A: Provides the framework for charges on specified electronic payment modes.
• RBI Act, 1934: Establishes the Reserve Bank of India.
• Information Technology Act, 2000: Provides legal recognition to electronic records and authentication.

Back2Basics: NPCI

• Full form: National Payments Corporation of India.
• Established: 2008.
• Nature: Not-for-profit company.
• Promoted by: Banks under the guidance of RBI and Indian Banks’ Association (IBA).
• Key systems: UPI, RuPay, Immediate Payment Service (IMPS), FASTag and Bharat Bill Payment System (BBPS).

Government Initiatives

• UPI Incentive Scheme: Supports the cost of low-value UPI transactions.
• Digital India Programme: Expands digital infrastructure and inclusion.
• BHIM: Bharat Interface for Money, NPCI’s UPI application.
• RuPay: Domestic card network.
• JAM: Jan Dhan-Aadhaar-Mobile trinity supporting digital transfers and financial inclusion.

“[2026] Which one of the following statements about Unified Payments Interface (UPI) and Central Bank Digital Currency (Digital Rupee) is NOT correct?

(a) UPI is a real-time payment system but Digital Rupee is akin to sovereign paper currency

(b) In case of UPI, settlement for end users happens instantly; in case of Digital Rupee, wallet balance gets transferred to another wallet (no traditional settlement)

(c) UPI transactions are recorded by banks and reflected in bank statements; in case of Digital Rupee, no data is captured in bank statements

(d) In both the cases (UPI and Digital Rupee), the liability lies with the users and their respective banks