India ends free ride for larger transactions on its ubiquitous digital payments network

Merchants accepting larger payments now face a new cost that previously did not exist.

India's Unified Payments Interface (UPI), a widely used digital payment network, will introduce a 0.4% merchant fee for transactions exceeding ₹2,000 (approximately $21) starting October 15. This marks a significant change for a system that has been free for merchants to accept payments since 2020. The National Payments Corporation of India (NPCI), which operates UPI, stated that consumers will continue to use the service without charge. Fees are capped at ₹300 for transactions of ₹75,000 or more. Small merchants earning up to ₹100,000 monthly via UPI will be exempt from these new charges. This policy shift follows an amendment to India's payments law in August, which allowed for merchant fees on certain UPI transactions. The NPCI argued that the previous zero-fee model was unsustainable given the network's vast scale and operational costs, estimated at around ₹200 billion ($2.1 billion) annually.

The introduction of merchant fees on UPI, particularly for larger transactions, signals a move towards the long-term sustainability of India's digital public infrastructure. While initially designed for mass adoption, the operational costs of running a network processing billions of transactions monthly have necessitated a revenue-generating model. This shift acknowledges that digital infrastructure, like physical infrastructure, requires ongoing investment to maintain and improve services such as cybersecurity and fraud prevention.

This change will likely affect businesses with tighter margins, who may need to reassess their pricing strategies or absorb the new costs, potentially impacting consumer prices. However, the exemption for smaller transactions and small merchants aims to preserve the accessibility and widespread use of UPI for everyday purchases and smaller businesses, mitigating a significant disruption to India's digital payment ecosystem.