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What India Gains By Charging An Ultra Low MDR Fee To Keep UPI Payments Free

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The Commune
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What India Gains By Keeping UPI Payments Free

The debate over charging for UPI transactions has increasingly focused on a simple question: if UPI costs money to operate, why should users not pay for it?

The argument sounds straightforward. Banks, payment companies and the wider financial ecosystem have costs to bear, while UPI transactions have largely remained free for consumers. The government has also spent public money supporting the payment infrastructure.

But that may be the wrong way to look at the economics of UPI.

The more important question is not how much it costs to process an individual UPI transaction, but what India gains by moving economic activity from cash to a digital payment rail — and what additional economic value can be created from that digital activity.

That distinction becomes important as the National Payments Corporation of India (NPCI) and the government examine ways of making the UPI ecosystem financially sustainable.

A recent update on the UPI merchant discount rate (MDR) structure has brought the issue back into focus. This involves a 0.4% MDR on UPI payments above ₹2,000, with small merchants and person-to-person transactions exempted.

But the economics of UPI cannot be assessed simply by comparing the cost of maintaining the digital infrastructure with the revenue generated from transaction fees.

Who Is Actually Losing Money Because UPI Is Free?

One argument made is that UPI is effectively being subsidised because consumers do not directly pay for most transactions.

But the wider payment ecosystem already generates enormous economic value.

The Reserve Bank of India’s surplus is transferred to the government at ₹2.87 lakh crore, listed bank profits at ₹4.11 lakh crore and NPCI’s pre-tax surplus at about ₹1,888 crore.

At the same time, the cost of maintaining India’s physical cash ecosystem is substantial.

ATM infrastructure, cash transportation, security, replenishment, handling and reconciliation all require resources. The estimated cost of running ATMs and cash logistics in India are said to be around ₹30,500 crore.

That creates a different economic comparison.

Instead of asking only how much it costs to process a UPI transaction, the question becomes: what would it cost to process the same economic activity through cash?

India’s own payment-system data shows how dramatically UPI has expanded. RBI data recorded more than 1.31 billion lakh UPI transactions in FY 2023-24, with a total value of nearly ₹2,000 trillion, demonstrating the scale to which the digital rail has grown.

The number of UPI QR codes has also expanded rapidly, reaching more than 6,000 lakh by early 2025 in RBI’s payment-system data.

That scale matters because UPI is not merely another payment application.

It is an interoperable infrastructure connecting banks, fintech companies, merchants and consumers through a common rail.

UPI’s Real Value May Begin After the Payment

The strongest economic argument is that the transaction itself may not be where UPI’s biggest value lies.

Every digital transaction can potentially create information about economic activity: subject to consent, privacy safeguards and appropriate data-use rules.

That information can be particularly important for people and businesses that have historically struggled to obtain formal credit.

A small business may have limited collateral or conventional financial records. A rural entrepreneur may have irregular income that does not fit traditional underwriting models.

But regular digital cash flows can provide lenders with another source of information about the business.

That can create a chain:

UPI transaction → verified economic activity → better credit assessment → more lending → more enterprise → more investment and employment.

The Reserve Bank has already expanded the role of UPI beyond simple account-to-account payments. In 2022, it announced measures to permit banks to operate pre-sanctioned credit lines through UPI, explicitly noting that UPI’s existing infrastructure could be leveraged to develop new financial products.

That points towards a broader role for the payment rail.

India’s Credit Problem is Bigger Than its Payment Problem

There is a structural problem: India’s credit-to-GDP ratio remains well below the global level.

There are also significant differences in access to formal credit between large businesses and micro and small enterprises, between urban and rural populations, and across regions.

That makes the credit opportunity potentially much larger than the revenue that could be collected through a small charge on individual transactions.

If UPI can help banks assess previously credit-constrained households and businesses more accurately, the economic value could come through interest income, business expansion, investment and formalisation rather than merely through a payment fee.

This is why the argument that “UPI must be monetised” needs to be separated into two different questions.

Should the payment transaction itself be monetised?

And:

Should the economic infrastructure created by those transactions be used to create additional financial value?

They are not the same thing.

The Opportunity Cost of Cash

There is also another side to the subsidy argument.

If UPI transactions are charged in a way that discourages digital payments, some transactions could shift back towards cash.

That does not make the cash alternative free.

Cash requires ATMs, transportation, security, physical handling, counting, reconciliation and replenishment.

Digital payments replace a significant part of that physical infrastructure with software, telecommunications and financial settlement infrastructure.

The relevant economic comparison, therefore, is not simply: UPI cost versus UPI revenue.

It is: UPI’s social and economic benefits versus the cost of the alternatives it replaces.

That is the concept of opportunity cost.

So, is Charging UPI Actually a Good Thing?

The UPI debate is bigger than whether transactions should be charged. The real question is whether UPI should be monetised as a payment service or used as infrastructure for a much larger credit economy.

Keeping payments free or inexpensive encourages wider adoption. More transactions create more digital financial activity, which, with consent and safeguards, can help lenders assess borrowers and extend credit.

That creates a different monetisation model:

Low-cost payments → more digital activity → better financial data → more credit → more investment and enterprise.

The opportunity is particularly significant for households, MSMEs, rural businesses and others underserved by conventional banking.

South Korea offers an illustrative example of how deeper private credit can accompany manufacturing, exports and rising incomes. It does not prove that UPI-linked credit would produce the same outcome in India.

The basic point is simpler: UPI does not need to make money from every transaction to create economic value. Its greater value may lie in the financial ecosystem built on top of the payment rail.

So the bigger question is not “Who should pay for UPI?”

It is: “How can India use UPI to unlock the credit its households and businesses still lack?”

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