22

Sep

UPI: Is India Finally Asking Who Will Pay for Free Digital Payments?

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Shivaji Sarkar

New Delhi | Tuesday | September 22, 2026

The debate over merchant charges is not merely about UPI. It is about the hidden cost of India’s digital revolution—and who should bear it.
India’s extraordinary digital-payment revolution has reached a curious turning point. UPI, which was promoted as a fast, convenient and almost cost-free alternative to cash, is now entering a phase in which at least some users of the system will have to pay for it.
From October 15, merchant payments above ₹2,000 will attract a Merchant Discount Rate (MDR) of 0.4 per cent, subject to a ceiling of ₹300. Person-to-person transactions will remain free, as will merchant transactions up to ₹2,000 and those covered by specified exemptions. The government says that around 96 per cent of merchant transactions will remain unaffected.
Yet the announcement has provoked opposition from sections of the trading community. The concern is understandable. In a business environment where margins are often extremely thin, even a small transaction cost can become significant when multiplied thousands of times.
But there is another side to the story that deserves greater attention.
For nearly six years, India has effectively treated digital payments as if the infrastructure behind them carries no cost. That assumption was always unrealistic.
Free does not mean costless
UPI has been an extraordinary success. In August 2026, it processed 24.51 billion transactions worth ₹29.82 lakh crore. Such numbers demonstrate not only the scale of UPI but also the extent to which it has become embedded in everyday commerce.
But a payment system processing billions of transactions every month requires enormous investment. Banks and payment companies have to maintain servers, networks, cybersecurity systems, fraud detection mechanisms, customer-support infrastructure and regulatory compliance.
The cost of digitalisation has not disappeared. In many cases, it has merely changed its form.
The old banking system spent money on cash transportation, vaults, physical branches and currency management. The new system spends continuously on cybersecurity, software, cloud infrastructure, data protection, fraud prevention, anti-money-laundering systems and technological upgrades.
Digitalisation has shifted banking costs from physical infrastructure to permanent technological expenditure.
The question is therefore legitimate: if a merchant derives a commercial benefit from a sophisticated payment infrastructure, is it unreasonable that a small part of its cost should eventually be shared by the merchant?
That is the argument behind the new MDR regime.
The banking system has its own problems
The timing is significant because Indian banks are operating in a substantially different environment from a decade ago.
On the surface, the banking sector looks considerably healthier. Gross NPAs have fallen sharply, capital buffers are stronger and profitability has improved. The RBI reported a gross NPA ratio of 2.3 per cent for scheduled commercial banks at the end of March 2025.
But low NPAs should not be mistaken for the absence of risk.
Banks continue to face the difficult task of balancing credit expansion with deposit mobilisation. Household savings are increasingly moving towards mutual funds, equities and other financial assets. Banks consequently have to compete harder for deposits and, in many cases, pay more to retain them.
The result is pressure on the cost of funds and, consequently, on margins.
At the same time, banks have to spend heavily on digital infrastructure and risk management. The spectacular expansion of digital payments has therefore created a paradox: the payment system has become cheaper and easier for the customer while becoming increasingly expensive to operate for the financial institutions supporting it.
The Jan Dhan lesson
There is a similar lesson in financial inclusion.
The Pradhan Mantri Jan Dhan Yojana has brought hundreds of millions of people into the formal banking system. This is an important achievement. But universal banking access is not free.
Millions of basic accounts generate little or no direct fee income, while banks still incur costs in maintaining accounts, providing customer service, meeting compliance requirements and operating infrastructure in remote areas.
The question is not whether financial inclusion was desirable. It clearly was.
The question is who should pay for it?
The same question now confronts the digital-payment revolution.
Cash has not disappeared
One of the strongest assumptions behind the digital-payment campaign was that digital transactions would progressively reduce the country's dependence on cash.
That has not happened in the manner once expected.
Digital payments have grown spectacularly, but so has the currency stock. Cash and digital payments have largely developed alongside each other rather than one simply replacing the other.
This is an important distinction. India is not becoming a cashless economy. It is becoming a multi-payment economy, in which cash, cards, bank transfers and UPI coexist.
That reality should inform public policy.
There is little justification for treating cash as inherently backward or digital payment as inherently superior. Each has advantages, costs and risks.
The hidden risks of digital finance
Digital payments also create vulnerabilities of their own.
Cyber fraud, identity theft, payment failures, system outages and data-security concerns are now part of the financial landscape. Banks must invest continuously to contain these risks.
Fraud patterns are also changing. Retail banking, digital transactions, microfinance and other sectors have all become increasingly interconnected. The greater the dependence on digital systems, the greater the importance of keeping those systems secure and resilient.
In this sense, a payment system cannot be judged only by how cheaply a customer can make a transaction.
It must also be judged by who finances its infrastructure, who bears its risks and whether it remains sustainable in the long run.
The real issue is sustainability
The present controversy should therefore not be reduced to a simplistic battle between cash and digital payments.
Nor should the introduction of MDR be seen automatically as an attack on consumers. Most ordinary users will continue to make UPI payments without paying a charge. The stated policy is aimed primarily at selected merchant transactions.
But the government will have to ensure that merchants do not simply pass the cost to consumers in disguised forms. Transparency will be essential.
At the same time, merchants and consumers must recognise that free to the user does not mean free to the system.
India has built a remarkable digital-payment infrastructure. It would be equally remarkable if the country failed to develop a sustainable economic model to maintain it.
The debate over UPI charges therefore raises a much bigger question than the proposed 0.4 per cent MDR.
Who should pay for convenience?
For years, the answer was largely: the financial system and, indirectly, the taxpayer.
Perhaps India has now reached the stage where that answer needs to be reconsidered.
The objective should not be to discourage digital payments or push India back towards a cash-dominated economy. Nor should every digital transaction be treated as inherently efficient merely because it is digital.
The sensible approach is to recognise the real cost of both systems and distribute that cost fairly.
UPI may have started as a revolutionary experiment in free digital payments. Its next stage will be to prove that a system handling trillions of rupees can also be financially sustainable.
The age of free digital payments may be ending. The more important question is whether India can make the next phase both affordable and sustainable.

( A senior journalist and media activist, Shivaji Sarkar specialises in writing on financial matters)

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