India Opens the Door to Merchant Fees on UPI

India recently changed its rules that kept merchants using the Unified Payments Interface (UPI) from paying fees on payments and transactions. The new rules open the path to limited merchant discount rate (MDR) fees, while keeping consumer payments fee-free in an overhaul that could give banks and fintechs operating in the country new revenue for infrastructure and fraud controls without charging ordinary users. However, the new rules alone do not impose a finalized MDR regime.

India’s UPI is a bank-to-bank payment system that allows millions of users in the country to send and receive money almost instantly, around the clock, using only a smartphone app linked to their bank account. Currently, approximately 555 million consumers and 65 million merchants use the system, making it a globally recognized financial powerhouse. Moreover, UPI is no longer exclusive to India, and has expanded its operations for Indian travelers and diaspora to 11 countries in Asia, Europe, and the Middle East.

India originally established its zero-MDR regime in January 2020 with the intention of accelerating adoption of digital payments. This meant, for example, that when a customer pays a merchant using a credit or debit card, the merchant doesn’t get the full amount, because a small percentage (the MDR) is deducted at source to cover the costs of securing and maintaining the digital payment network. As a result, banks and fintechs like PhonePe were not allowed to charge merchants anything for processing UPI transfers.

Many payment companies have said that the previous 100% free system has become financially unsustainable as they collectively process billions of transactions requiring massive server infrastructure. The new laws remove the blanket legal ban on charging fees for UPI, opening the way for a calibrated, low-percentage MDR, likely in the region of 0.3 to 0.5%. Nonetheless, India’s Finance Minister Nirmala Sitharaman has explicitly clarified that consumers and small street vendors will remain exempt from all fees. Instead, fees will apply only to large corporate businesses that handle high-value transactions.

The concerns of payment companies are not unfounded. Reuters Breakingviews reports that UPI processed around 24 billion transactions with a total value of almost 30 trillion rupees in July 2026 alone. Such a scale puts enormous strain on technical and operational infrastructure, thus encouraging the Indian government to pour further investment into infrastructure, cybersecurity, and fraud prevention. It also seeks a more self-sustaining model capable of encouraging more providers to participate and invest, stating that “reliance on subsidies alone is not viable for the next wave of growth.”

While free or heavily subsidized infrastructure can be enormously effective for driving growth, as India’s UPI system has aptly demonstrated, scale brings increasing costs in maintaining governance, security, and uptime. As such, India’s example serves as a global case study as to whether a country can introduce a mature instant-payment infrastructure that enables selective monetization without undermining financial inclusion or encouraging merchants to look for cheaper alternatives. The question now is whether India can sustain its UPI system while retaining the accessibility that drove its extraordinary adoption in the first place.