(This article was first published on Inc42.)
A survey report by LocalCircles in March revealed a startling fact: more than 70% users may stop transacting via UPI if there is a fee! The debate over fees for UPI transactions drew everyone’s attention in August 2022 when the Reserve Bank of India (RBI) released a discussion paper proposing a tiered fee structure for UPI payments. However, the proposal was not taken forward and the government said it would not levy any charges since UPI is a ‘digital public good’. Interestingly, the topic rekindled a discussion among industry stakeholders, experts and small UPI players: how to make UPI sustainable?
Let’s look at what UPI does today.
UPI facilitated more than 48 crore transactions per day while the monthly value reached 20.64 lakh crore in July, according to NPCI. The sheer size of UPI – both in terms of volume and value – makes it a strong driver of financial inclusion as it enables millions of Indians from across varied socio-economic strata to make and receive payments.
The number of participating banks on UPI, according to NPCI, has grown to 605 in July. Despite its popularity and widespread use, the UPI ecosystem currently operates with little direct revenue generation from users or merchants. Instead, according to government data shared with an online news portal, Rs 3600 crore was spent between 2021 and 2024 to promote UPI and RuPay.
Considering its growth, digital banking consultants have suggested that introducing fees could ensure UPI's long-term sustainability. The Reserve Bank of India’s (RBI) Payments Vision 2025 also presents a strategic plan designed to enhance India's digital payments ecosystem. A central focus of this vision is the acknowledgment of the costs associated with delivering digital payment services, such as switching fees and interchange fees.
The need to introduce fees for UPI transactions
In the previous RBI proposals aimed to introduce charges for UPI transactions includes the possibility of implementing a tiered fee structure based on different transaction amount bands. This approach could help balance the interests of various stakeholders while ensuring the sustainability of the digital payments ecosystem. One key advantage of UPI for merchants is the relatively low cost of infrastructure required for acceptance. Unlike card-based payment systems, which often necessitate the installation of expensive point-of-sale (POS) terminals, UPI relies on
QR codes. This technology is more affordable and easier to implement, making it accessible to a wider range of merchants, particularly small and medium enterprises.
Comparison with Other Digital Payment Methods
UPI is preferred for its cost-free transactions, unlike other digital payment methods, such as credit and debit cards, which typically charge fees. However, this no-fee structure might limit UPI platforms’ ability to invest in new features, security measures, and customer acquisition. Chief financial officers of international UPI companies suggest that merchants’ fees on UPI transactions encourage investment in the platform by creating a revenue stream to support ongoing development.
Maintaining Competitiveness with Other Payment Methods
Notwithstanding financial inclusion as one of UPI’s key goals, if implemented thoughtfully, fees could also provide resources to expand UPI’s reach and capabilities, benefiting more users. RBI discussion paper suggests that UPI, functioning similarly to other payment systems such as Immediate Payment Service (IMPS), should have a fee structure that reflects its operational costs. The RBI has noted that various stakeholders incur an average cost of around ₹2 per UPI transaction, which could justify the introduction of a tiered charge based on transaction amounts.
There are charges already been levied on Credit lines from UPI, but it should also come up for bank accounts as well, so that everybody gets to have a little bit of share for the value they add in the ecosystem in order to remain competitive. Additionally, a reward system should also be introduced for those customers willing to pay charges, similar to that of Credit Cards. This way UPI will enhance the overall ecosystem alongside supporting financial inclusion. This competition of charges can lead to a "better customer experience," benefiting users through improved services and options.
Market Dynamics: Dominance and Competition
The UPI market is currently dominated by Google Pay and Walmart-owned PhonePe, which account for approximately 80% of transactions. Another major player, Paytm, has seen its UPI transactions drop from 1.4 billion in February to 1.3 billion, partly due to regulatory limitations over claims of non-compliance. This dominance by a few large players poses challenges for small merchants, especially roadside vendors, who might be most affected if a flat Merchant Discount Rate (MDR) structure were introduced. Although a tiered MDR structure based on average monthly volumes is more likely, the concern remains that some vendors might go back to preferring cash transactions. However, introducing fees could encourage smaller businesses to focus on acquiring new customers and competing more effectively with these giants, thereby
leading to a more dynamic and competitive market landscape, benefiting consumers with better choices and services.
Way forward
As the RBI and stakeholders engage in discussions around the introduction of charges for UPI transactions, it's essential to consider the cost advantages that UPI offers to merchants. The debate should also factor in the challenges and the opportunities of sustainability, competition, and user expectations in India’s digital payment ecosystem.
A well-designed tiered fee structure could help maintain the affordability of UPI for merchants while ensuring the financial sustainability of the payment ecosystem. Although experts suggest a minimal fee structure that won't deter users, it's clear that personal/peer-to-peer UPI transactions should remain free to support widespread digital adoption. Finally, finding the right pricing balance will be crucial for UPI's continued growth and its role as a cornerstone for an inclusive global digital economy.
