Finding a balance between affordability and sustainability

According to NPCI, UPI facilitated more than Rs 48 Cr transactions per day, while the monthly value reached Rs 20.64 Lakh Cr in July.

The UPI market is currently dominated by Google Pay and Walmart-owned PhonePe, which account for about 80% of transactions

The RBI discussion paper suggests that UPI should have a fee structure that reflects its operating costs

A survey report by LocalCircles in March revealed a surprising fact: more than 70% of users might terminate transactions through UPI if a fee is applied. The debate on fees for UPI transactions caught everyone’s attention in August 2022 when the Reserve Bank of India (RBI) released a discussion paper proposing a tiered fee structure for UPI payments.

However, the proposal was not pursued and the government stated that it would not impose any fees as UPI is a “digital public good”. Interestingly, the issue sparked a discussion among industry representatives, experts and small UPI players: How can UPI be made sustainable?

Let’s look at what UPI is doing today.

According to the National Payment Corporation of India (NPCI), UPI facilitated more than 48 Cr transactions per day, while the The monthly value reached Rs 20.64 lakh cr in July.. The sheer size of UPI – both in terms of volume and value – makes it a powerful driver of financial inclusion, enabling millions of Indians from different socioeconomic backgrounds to make and receive payments.

The number of participating banks in UPI increased to 605 in July, according to NPCI. Despite its popularity and widespread usage, the UPI ecosystem currently operates with little direct revenue from users or merchants. Instead, INR 3,600 Cr has been spent to promote UPI and RuPay between 2021 and 2024, according to government data provided to an online news portal.

Given the growth, digital banking consultants have suggested that introducing fees could ensure the long-term sustainability of UPI. The Reserve Bank of India’s (RBI) Payments Vision 2025 also presents a strategic plan to improve India’s digital payments ecosystem.

A central point of this vision is the recognition of the costs associated with the provision of digital payment services, such as exchange fees and interchange fees.

The need to introduce fees for UPI transactions

The RBI’s previous proposals aimed at introducing fees on UPI transactions included the possibility of introducing a tiered fee structure based on different transaction amount bands. This approach could help balance the interests of different stakeholders while ensuring the sustainability of the digital payments ecosystem.

A key advantage of UPI for merchants is the relatively low cost of the infrastructure required for acceptance. Unlike card-based payment systems, which often require the installation of expensive POS terminals, UPI is based on QR codes. This technology is more cost-effective and easier to implement, making it accessible to a wider range of merchants, especially small and medium-sized businesses.

Comparison with other digital payment methods

UPI is preferred because of its free transactions, unlike other digital payment methods like credit and debit cards, which usually charge a fee. However, this fee-free structure could limit the ability of UPI platforms to invest in new features, security measures and customer acquisition.

Chief financial officers of international UPI companies suggest that merchant fees for UPI transactions will encourage investment in the platform by creating a revenue stream to support ongoing development.

Maintain competitiveness against other payment methods

Notwithstanding that financial inclusion is one of the main objectives of UPI, fees, if implemented judiciously, could also provide means to expand the reach and capabilities of UPI and thus benefit more users. The RBI’s discussion paper suggests that UPI, which functions similarly to other payment systems such as Immediate Payment Service (IMPS), should have a fee structure that reflects its operational costs.

The RBI has observed that on an average, the various parties incur a cost of around Rs 2 per UPI transaction, which could justify the introduction of a tiered fee based on the transaction amount.

UPI credit lines already have fees, but these should be levied on bank accounts as well so that everyone gets a small share of the value they contribute to the ecosystem to remain competitive. In addition, a reward system should be introduced for customers who are willing to pay fees, similar to credit cards.

In this way, UPI will improve the entire ecosystem while supporting financial inclusion. This fee competition can lead to a “better customer experience” and benefit users through improved services and options.

Market dynamics: dominance and competition

The UPI market is currently dominated by Google Pay and Walmart-owned PhonePewhich account for about 80% of transactions. Another major player, Paytm, has its UPI transactions Decline from 1.4 billion in February to 1.3 billionpartly due to regulatory limitations on claims for non-compliance.

This dominance by a few large players poses challenges for small merchants, particularly street vendors, who could be hit the hardest if a flat Merchant Discount Rate (MDR) structure were introduced. Although a tiered MDR structure based on average monthly volume is more likely, concerns remain that some merchants may return to preferring cash transactions.

However, the introduction of fees could encourage smaller companies to focus on acquiring new customers and compete more effectively with these giants. This would lead to a more dynamic and competitive market environment and provide consumers with better choice and services.

Way forward

As the RBI and stakeholders debate the introduction of fees on UPI transactions, it is important to consider the cost benefits that UPI offers to merchants. The debate should also consider the challenges and opportunities related to sustainability, competition and user expectations in India’s digital payments ecosystem.

A well-designed, tiered fee structure could help keep UPI affordable for merchants while ensuring the financial sustainability of the payments ecosystem. While experts suggest a minimal fee structure that does not deter users, it is clear that personal/peer-to-peer UPI transactions should remain free to support widespread digital adoption.

Ultimately, finding the right pricing balance will be critical to UPI’s continued growth and its role as a cornerstone of an inclusive global digital economy.