We innovated with UPI. Why not with merchant fee?

Why in the News

Unified Payments Interface (UPI) payments are moving from no merchant charge to a card-style merchant discount rate (MDR) of 0.40 per cent with a maximum of Rs 300. Welcomed as making UPI self-sustaining, the fee still raises whether a rail built as an alternative to card networks should copy their percentage-of-value pricing.

What is UPI, and how does it differ from a card payment?

1. What it is: UPI moves money directly from one bank account to another, across any bank or app, at population scale. India built it as a home-grown rail to cut dependence on international card schemes.
2. Credit transfer (push): The payer starts the payment from their own account. Real Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT) and Immediate Payment Service (IMPS) work alike.
3. Card payment (pull): The merchant starts a card payment, and the customer’s account or credit line is debited once approved.
4. Merchant discount rate (MDR): The fee a merchant pays on each payment it receives, the way card networks price their service.
5. The takeaway: As a push system, UPI resembles NEFT more than a card network, so card-style pricing is contested.

How has India priced its other credit-transfer rails?

1. Slab pricing, not percentages: NEFT and RTGS have charged fixed slab fees with maximum caps, not a percentage of the amount sent.
2. NEFT example: NEFT historically charged at most Rs 5 for transfers up to Rs 1 lakh.
3. IMPS rule: In 2016 the government directed public-sector banks that IMPS charges above Rs 1,000 must not exceed NEFT charges.
4. Real-time precedent: The National Payments Corporation of India (NPCI), which runs UPI, priced its real-time IMPS system in simple, low slabs. A percentage MDR breaks that tradition.

What does it actually cost to run UPI?

1. NPCI’s cost per transaction: An Indian Institute of Management (IIM) Bangalore analysis puts NPCI’s 2024-25 cost at about 9.8 paise per transaction.
2. Operating cost alone: Without marketing, the cost is around 5 paise per transaction.
3. Wider ecosystem costs: Banks, merchant acquirers (firms that sign up merchants), fraud management, security and customer support add costs beyond NPCI’s own.
4. Low cost at scale: NPCI keeps its cost to a few paise by running very high volumes frugally, a lesson for the wider ecosystem.

Should UPI adopt card-style pricing?

1. Sustainability within purpose: Banks and technology firms must earn enough to keep running, and profit is not the problem. That need should not override UPI’s public purpose.
2. Participation, not revenue: UPI and India’s Digital Public Infrastructure (DPI) were built to widen economic participation, not to maximise revenue. Eg. A small merchant accepting Rs 50, or a migrant sending money instantly.
3. Pricing as the next innovation: UPI’s next innovation should be how the rail is priced, not only how it moves money, because efficiency must serve well-being.

Challenges

1. Small merchant burden: A percentage fee weighs most on small merchants with thin margins, who may steer customers back to cash.
2. Fee rises with value, cost does not: A percentage MDR grows with payment size, but processing cost per transaction stays flat.
3. Unclear cost base: No published benchmark shows what revenue banks and acquirers need.

Way Forward

1. Slab-based charge: The government and NPCI should price UPI in flat rupee slabs with a low cap, matching NEFT and IMPS practice.
2. Annual cost study: NPCI should publish a yearly cost-of-service study so any fee is tied to measured cost.
3. Small-payment exemption: The government should exempt small-value payments so participation does not fall.

Conclusion

The UPI fee debate is about whether a public payment rail is priced as infrastructure or as a card network. The final design, percentage or slab, will decide whether small merchants stay digital.

Key numbers

1. NPCI’s 2024-25 base: Expenses of Rs 2,270 crore against 230.2 billion transactions (IIM Bangalore analysis).
2. NEFT above Rs 1 lakh: Maximum charge of Rs 25.
3. RTGS caps: Rs 25 for transfers of Rs 2 to 5 lakh; Rs 50 above Rs 5 lakh.
4. UPI users: Over 800 million active users (May 2026).

Payment Systems and DPI in India

1. Digital Public Infrastructure: DPI is a set of shared digital systems for development and inclusion. Through India Stack, India was first to build all three pillars: digital identity, fast payments and consent-based data sharing.
2. UPI’s scale: UPI processed about 23.2 billion transactions in May 2026.
3. RuPay credit on UPI: From June 2026, an MDR applies to large RuPay credit card transactions on UPI, raising merchant costs.

Matching Previous Year Question

“[2026] An e-commerce revenue model where the seller has control over pricing but doesn’t keep products in stock and instead transfers customer orders and shipment details to a third-party supplier, who then ships the goods directly to the customer, is called: (a) Dropshipping Model (b) Affiliate Revenue Model (c) Transaction Fee Revenue Model (d) Agency Revenue Model Answer: A”