‘UPI needs funding to ensure free service’

Now that India’s Unified Payments Interface (UPI) is handling about 21 billion transactions every month and has become a crucial financial infrastructure for consumers and small merchants, a funding requirement is essential to keep UPI free for majority users, say industry officials.

UPI’s success has reshaped everyday commerce, bringing millions of small merchants into the formal economy and making instant digital payments routine across income groups, they added.

For individuals and kirana stores, UPI’s zero-cost structure has been central to this transformation and remains a policy priority.

Stating that person-to-person transactions continue to be free, and small and micro-merchants remain exempt from charges, officials said for sustainability a long-term funding framework should be put in place to support this scale of activity.

 “UPI has reached a level of scale where sustainability and reliability must be treated as system priorities. Keeping UPI free for consumers and small merchants is essential and should not change,” said Vishwas Patel, Chairman, Payments Council of India.

“At the same time, a payments infrastructure of this magnitude requires predictable investment in uptime, fraud prevention, and dispute resolution,” he said.

“A differentiated approach that recognises the role of large, high-volume merchants can help strengthen the ecosystem without compromising inclusion,” he added.

UPI today supports far more than basic payments. It enables merchant transactions, mandates, credit-linked products, recurring payments and early-stage cross-border use cases. 

Ajay Rajan, Country Head – Transaction Banking, Government, MNC & New Economy Business & IBU, Yes Bank said, “Government’s initiative to enable zero cost for the customer to use UPI was the right policy choice to drive inclusion and adoption in its early years.”

“UPI’s massive volumes, both by value and volumes is testimony to this vision and execution. To sustain this core financial infrastructure, continued tangible investment in resilience, security, and service quality would be required to be made by all the ecosystem players and commensurate commercial compensation model would help them bring in the next wave of inclusion and adoption,” he added.

As volumes have surged, operational demands have intensified. This shift has renewed attention on the absence of a structural revenue model for the ecosystem. 

Current government support, including the recent ₹2,000-crore allocation as an incentive for UPI merchant transactions, helps offset payment service costs primarily for small merchants. 

But, large merchants and digital platforms processing high-value, high-frequency transactions continue to rely on the same infrastructure, placing significantly greater demands on system capacity, reliability and fraud management. 

Industry participants note that this support, combined with balance-sheet absorption by banks and payment service providers, is increasingly misaligned with the demands of a system processing billions of transactions every month.

Much of the public discussion around Merchant Discount Rate (MDR) has been framed as a binary choice between keeping payments free and charging merchants. 

Analysts point out that merchant profiles vary widely. Small offline retailers and large platforms processing high-value, high-frequency transactions place very different demands on the system and derive different levels of economic value from it.