As UPI completes a decade, the debate is shifting from adoption to economics. The system works at scale — but not for free.

A LocalCircles survey shows 75% of users would stop using UPI if transaction fees are introduced, while only 25% are willing to pay. At the same time, 57% of users said they have faced at least one instance of a merchant refusing UPI and asking for cash in the past year.

Taken together, the data points to a system where users resist paying, while parts of the merchant ecosystem are already showing friction.

UPI is free — but not costless

UPI transactions do not carry any charge for users or merchants today because the government removed merchant discount rate (MDR) in 2020, effectively mandating zero fees on such payments.

Before that, merchants typically paid a small fee — around 0.2–0.3% per transaction — to banks and payment processors. That fee funded the payment infrastructure.

Today, that revenue line is gone, but the cost hasn’t disappeared.

For every ₹100 UPI transaction:

Earlier: ~₹0.20–₹0.30 would be earned as MDR

Now:

User pays ₹0

Merchant pays ₹0

Banks and payment apps still incur processing costs

The government compensates the ecosystem through an incentive scheme, but the pool — roughly ₹2,000 crore annually — does not fully match the scale of transactions being processed.

Why costs are becoming a concern

UPI now processes over 240 billion transactions annually, according to industry estimates.

At that scale, even a few paise per transaction translates into a large system-wide cost. The result is a structural mismatch:

• Costs rise with volume

Banks bear infrastructure and settlement costs, while payment apps spend on technology, customer acquisition and support — without a direct revenue stream from the transaction itself.

How the ecosystem is adapting

With direct charges off the table, players are trying to recover costs elsewhere. This includes:

• Credit on UPI: Linking credit cards and offering small-ticket loans

The transaction remains free, but the user is monetised around it.

Merchant pushback and policy dilemma

The 57% figure on merchant refusal does not have a comparable year-on-year baseline, but it indicates that friction already exists even without formal charges. That leaves policymakers with a narrow path. Introducing fees risks hitting usage directly, while continuing with zero pricing requires sustained subsidy or alternative revenue models.

UPI’s success has locked in a user expectation that payments should be free. The challenge now is not expanding the system — but figuring out how to sustain it without changing that expectation.