India allows banks to charge merchants a fee on select UPI transactions

India’s regulators have opened the door for banks and payment processors to impose a merchant discount rate on UPI transactions. This ends the longstanding policy of zero visible fees for merchants using the instant payment network. The change applies only to certain transactions, with consumer transfers remaining free.

Under discussion, the MDR would range from 0.3 % to 0.5 % on larger transactions handled by big businesses. Merchants would bear this cost, which could reduce profit margins on high-value sales. Merchants whose transactions fall below the threshold would not incur the fee. The exact threshold and applicability have not yet been finalized.

If fees are introduced, merchants may reconsider the cost-benefit of accepting UPI, especially where alternatives like cash or card payments involve different fee structures. The network’s rapid expansion has been driven by its frictionless, no-cost experience for both users and merchants. Adding a fee could weaken that incentive, potentially slowing new merchant onboarding. Existing users might still enjoy free transfers, but merchant participation is crucial for transaction volume.

RBI governor Sanjay Malhotra noted that someone must pay the cost of maintaining the system, highlighting the sustainability challenge. Policymakers must balance the need for revenue with the risk of undermining the merchant base that fueled UPI’s growth. The outcome will shape whether UPI remains a near-zero-cost platform or evolves into a fee-based service.