UPI at 10: India’s Digital Payments Giant Faces a New Cost-Sharing Challenge

UPI at 10 Latest News

• UPI has completed 10 years since its launch, now accounting for 86% of all digital transactions in India. 
• But explosive growth has piled up costs for the payments ecosystem, reviving the debate on who should pay for it — with a recent amendment to the Payments and Settlement Systems Act, 2007 now permitting merchant fees on UPI payments.

How UPI Came About

• The RBI’s 2012 “vision document” noted an average Indian made just six non-cash transactions a year — a figure unthinkable today.
• UPI was built by the RBI-regulated NPCI and the Indian Banks’ Association, with groundwork starting in 2012-13.
• It launched as a pilot in April 2016 and went fully operational that August.
• By 2025-26, India recorded 28,174 crore digital transactions — 86% via UPI, used by over 55 crore people through 703 participating entities.

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Early Growth Was Slow

• Even after demonetisation in November 2016, adoption crawled: monthly transaction value stayed under Rs 10,000 crore until December 2017.
• It took another year to cross Rs 1 lakh crore a month.
• A key barrier was the Merchant Discount Rate (MDR) — the fee merchants paid on digital transactions.

Zero MDR: The Turning Point

• The Nandan Nilekani-led High-Level Committee on Deepening of Digital Payments (2019) recommended scrapping MDR for customers and small merchants, with government subsidy instead.
• From 2020, the government began subsidising UPI/RuPay transactions up to Rs 2,000, capped at 0.15% of transaction value, shared between banks and payment providers.
• The COVID-19 pandemic then accelerated adoption sharply, as people avoided cash handling.

Private Investment Fuelled the Boom

• A Bank for International Settlements (BIS) paper noted investment in Indian fintech spiked in 2019 (driven by UPI adoption and big deals like Paytm, PhonePe) and again in 2021 (post-COVID digital payment preference).
• Most investment flowed into companies offering payment services and point-of-sale infrastructure.

Banks Have Been Left Behind

• Two US-backed apps — PhonePe and Google Pay — together handled 80% of UPI transaction volume and 83% of value in July 2026.
• As per the experts, banks have “missed the payments bus” and can’t match these volumes.
• SBI itself handled just 0.1% of UPI volume in July — ranked fourth among banks, behind Kotak Mahindra Bank (0.6% share).
• A regulatory cap limiting any single player to 30% market share has been repeatedly postponed; the current deadline is December 2026.

The Cost Problem

• UPI transaction growth has been staggering — up 1,800%, compared to just 17% growth in card transactions since November 2019.
• This scale comes with rising costs — technology, banking infrastructure and compliance — estimated at around Rs 20,000 crore a year.
• Government subsidies for sub-Rs 2,000 transactions don’t cover this gap.

The Case for Reintroducing MDR

• Industry voices argue zero MDR was right for driving initial adoption, but the next phase needs to create more value per transaction, including data-driven credit access for merchants and consumers.
• The industry is pushing for MDR of 0.3-0.6% on transactions above Rs 2,000 for large merchants.
• Such transactions form just 4% of person-to-merchant payments but account for 68% of total value — making them a viable revenue base without hurting small merchants or ordinary users.

The Next Wave of Growth

• The finance ministry has said subsidies alone cannot sustain UPI’s next growth phase.
• Domestically, growth is expected to come from rural and semi-urban areas.
• Internationally, NPCI is targeting greater cross-border presence — UPI already operates in nine countries (Bhutan, France, Mauritius, Nepal, Singapore, Sri Lanka, UAE, Qatar, Cambodia).
• The India-Singapore UPI-PayNow linkage, active for over three years, is seen as a template, since traditional international transfers can cost up to 7% and take days to settle.

Conclusion

• UPI’s decade-long journey from a pilot project to handling 86% of India’s digital transactions is a genuine success story of financial inclusion. 
• But sustaining this scale now demands a fairer cost-sharing model — one that funds future growth without compromising the accessibility that made UPI a global example.

Source: IE