India is preparing the ground for a major shift in the way its Unified Payments Interface (UPI) is funded, with new legislation opening the door to merchant fees on certain transactions after years of operating under a zero-fee model.

While the proposed law does not introduce charges immediately, it creates the legal framework for future changes. Details, including which transactions could be affected, are expected to be determined at a later stage.

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A Turning Point For UPI

Since 2020, merchants have been able to accept UPI payments without paying merchant discount rates (MDR), helping the government rapidly expand the country’s digital payments ecosystem. Instead, the network has relied on state support to cover operational costs and encourage adoption.

That model is now facing growing pressure. As transaction volumes continue to climb, banks and fintech companies have argued that maintaining and expanding the infrastructure requires a more sustainable source of funding.

UPI processed a record 23.66 billion transactions worth ₹29.88 trillion (approximately $313.4 billion) in July, according to the National Payments Corporation of India (NPCI).

Merchant Fees Under Consideration

The legislation does not specify whether merchant charges will be introduced or how they would be structured. However, reports suggest policymakers are considering limiting any future fees to larger businesses rather than applying them across all merchants.

Industry leaders have welcomed the possibility of recovering part of the costs associated with technology, cybersecurity and product development, while keeping person-to-person payments free for consumers.

A New Revenue Opportunity

Analysts believe the proposal could unlock a significant new revenue stream for India’s payments industry. Investment bank Jefferies estimates that introducing merchant fees on higher-value UPI transactions could generate between ₹50 billion and ₹100 billion in annual revenue by the 2028 fiscal year.

According to brokerage firm Bernstein, transactions above ₹2,000 represent only a small share of total payment volumes but account for the majority of transaction value, making them a potential focus for any future pricing model.

Global Implications

The proposed changes will also be closely watched outside India as UPI continues to expand internationally. The payments network is already available in markets including Singapore, the United Arab Emirates and France.

Any future charging model could have significant implications for major payment providers such as PhonePe and Google Pay, although the impact will ultimately depend on how potential merchant fees are shared across banks, payment platforms and other participants in the ecosystem.