India’s flagship digital payment system, UPI, is under renewed scrutiny as industry stakeholders question the sustainability of its free model amid debates over who should bear its operational costs and the potential introduction of merchant charges.
India’s Unified Payments Interface is once again under scrutiny as banks, fintech firms and policy voices question how long the country’s flagship payment system can remain free without a clearer way to pay for it. Since January 2020, consumers and most merchants have not been charged for UPI transactions, but the debate over who should bear the cost of keeping the network running is intensifying. According to EquityPandit, industry figures now argue that the current model leaves the system dependent on indirect support and private absorption of operating expenses.
Upasana Taku, co-founder and chief financial officer of One Mobikwik Systems, said the government currently covers only about 10% to 11% of UPI’s real operating cost, with the rest falling on banks and payment firms. She said those expenses include servers, uptime, fraud prevention and cybersecurity. Taku also pointed to Mobikwik’s own experience, saying UPI transaction volumes at the company have risen 50% year on year while revenue has not kept pace because the service generates very little direct income.
The government, however, has kept up its insistence that ordinary users will not be charged for UPI payments and that most merchant transactions should remain free. On August 8, the Finance Ministry said any future merchant discount rate, or MDR, would apply only to a limited group of large merchants and would be set below the cost levels seen in card payments. At present, debit cards already carry MDR charges of 0.5% below Rs 2,000 and 0.9% above that threshold, while credit cards can cost merchants as much as 1.8%, even as UPI itself remains free.
Former State Bank of India chairman Dinesh Khara has said the debate should also be seen in global terms, pointing to Brazil and China, where small MDR charges have coexisted with very high levels of digital payment adoption. Taku cited a similar proposal from the Payments Council of India, which has suggested a range of 0.3% to 0.5% for UPI. Still, resistance to any charge remains strong: Fortune India reported a LocalCircles survey showing 75% of UPI users would stop using the service if fees were introduced. RBI Governor Sanjay Malhotra has acknowledged that UPI does carry costs, but said deciding who pays is for the government to determine. A parliamentary committee has separately recommended a tiered MDR system for large merchants, arguing that the annual government subsidy of about Rs 2,000 crore is not sustainable.
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