CHENNAI: Every time you scan a payment QR code and the payment is completed – it appears seamless, free of cost. But is the transaction actually free? While the unified payments interface (UPI) transactions remain free for users, the government bears the cost for maintaining the payment infrastructure behind the service by subsidising banks and other stakeholders, especially in case of small value transactions.
However, consecutive reductions in government subsidies and signs of further lowering it have put pressure on UPI providers, with industry experts indicating that a change in their business model may be imminent, particularly as the cost of running low-value transactions becomes a growing concern.
While the industry has raised concerns, financial sector experts—including some within the government—point out that the subsidy was introduced with temporary objectives, such as encouraging digital transactions during demonetisation and the Covid pandemic. They argue that expecting public money to permanently sustain private businesses is not a fair demand. More importantly, the core technology infrastructure for UPI payments was built by the government, and private players are already leveraging it for their business without making any significant investment of their own.
The finance ministry has reduced the incentive for processing small-value UPI payments at small merchant outlets to 0.15% per transaction from 0.25% previous year. This means that when banks earlier got an incentive of Rs 0.25 for a transaction of Rs 100, they’ll now get only Rs 0.15 for the same transaction.
In its budgetary allocation, the government reduced its incentive scheme for promotion of low-value BHIM-UPI transactions (Person to Merchant – P2M) for the financial year 2024-25. The incentive was more than halved to Rs 1,500 crores from Rs 3,500 crores in the previous year. However, the incentive payout by the Government was actually Rs 3,631 crores last year.
Further, the Reserve Bank of India governor Sanjay Malhotra recently hinted that the free lunch is soon to be finished. “Any important infrastructure must bear fruit,” he said in the Financial Express BFSI event in Mumbai recently. He added that for any service to be truly sustainable, “its cost should be paid whether collectively or by the user.”
The incentive exclusively covers UPI P2M transactions of up to Rs 2,000, specifically targeting small merchants to encourage the adoption of digital payments at the grassroots level. The incentive scheme was introduced to support participants in building secure digital payment systems and expand UPI services in tier 3 to 6 cities and remote areas.
He reiterated this on August 6, addressing reporters at the post-monetary policy presser in Mumbai. “Who pays is important but not so important than someone footing the bill. Someone will eventually need to cover these expenses. The sustainability of the UPI model is crucial. It is important to determine who will bear the cost. This could be done collectively or individually,” he said.
He also clarified, “I never said that UPI cannot stay free forever. What I said was there are costs (associated with UPI transactions), and they need to be paid for by someone."
The UPI was introduced in 2016 by the RBI-run National Payments Corporation. According to the RBI, in terms of volume, UPI transactions had the highest share (84 per cent) in total retail payments during 2024-25. Thanks to UPI, India accounts for 48.5 per cent share in global real-time payments by volume.
In July 2025, transactions worth Rs 25,08,498.09 crores were carried out through the UPI ecosystem, an eight fold increase from Rs 2,90,537.86 transacted in July 2020. The volume (the total number of transactions processed) in July spiked to the tune of 19.47 billion from 1.50 billion in 2020.
Experts also suggest that the UPI ecosystem would not remain free for long. “The ecosystem obviously has to be compensated for, this can't be free,” said Rahul Jain, a financial strategist and the Chief Financial Officer at NTT Data Payment Services India. “Currently UPI has been provided free of cost...previous few years, government was giving a good amount of subsidy on which the ecosystem could run by itself and sustain. But from this year onwards, the subsidy amount has gone substantially down,” he said.
“The margin becomes a bigger problem for them (payment aggregators) to sustain and on top of it, if UPI comes at cost, it becomes very difficult for them to go and offer it without cost to the customer... the payment aggregators, if they buy it at cost it will be very difficult for them to sell it free,” Jain said.
“If a transaction fee is introduced on UPI, payment aggregators will definitely have to rethink parts of their business model but how much depends on who is charged (merchant, customer, or both) and how high the fee is… If charges on UPI (are) to be introduced it can be for transactions above Rs 2000 or merchants under GST can be charged for UPI transactions fee. In short…they’ll have to tweak their business model,” he added.
However, some also argue that payment aggregators might not change their business models. "Firstly, UPI payment players — nearly 100 of them — entered the business after securing licenses by presenting their business and revenue models. This means they were fully aware of their margins and growth potential. So, prima facie, it is unfair and unreasonable for them to now expect government support to make money," said a financial services sector expert, who advises companies and also Independent Director on multiple boards.
"Secondly, while the top three players by market share in this sector are foreign companies, many of these firms in India actually earn from their lending business. The payment services, built with significant infrastructure and marketing investments, help them acquire valuable customer data, which in turn supports their lending operations. Therefore, I don’t think it’s a fair argument to rely on government support for the viability of their payment business," he added.
In June, the finance ministry had dismissed reports that merchant discount rate (MDR) would be levied on UPI transactions, calling the claims “completely false, baseless, and misleading. The government remains fully committed to promoting digital payments via UPI."
MDR, a fee charged to merchants by banks for processing digital payments, was made zero from January 2020 for RuPay debit cards and BHIM-UPI transactions, to encourage digital transactions.
The Governor’s statement comes after the National Payments Corporation of India (NPCI) introduced a new set of changes in rules related to how UPI apps such as Google Pay, PayTM, and Phone Pay…etc work from August 1.
According to the new rules, the NPCI has limited the number of balance checks and tries to access bank details. It has also introduced restrictions on features such as autopay requests, payment failures and linked account verifications.
“Those current checks and balances which has been put up is just to ensure that the system load is minimized because you would have seen in very recently maybe three months back the UPI system was down for one hour or two hours or something,” Jain said. “So the whole concern is for the banks and aggregators not to run those APIs (Application Programming Interface) of the balance check so that it doesn't impact the system very highly and it can work efficiently,” he added.
Will UPI still be the people’s choice if it’s no longer free?
Experts say that the introduction of a transaction fee might deter people from using the digital payment ecosystem. They suggest that people may not want to spend on UPI transaction fee as it will eventually add up to a significant sum at the end of the month.
According to a March 2025 survey conducted by LocalCircles, 73 per cent of respondents said they will stop using UPI if the government regularises a transaction fee for UPI. 40 per cent UPI users surveyed said they have been charged a transaction fee on one or more of their transactions in the last 12 months.
If you didn’t know already, payment aggregators charge you anywhere between Rs 1 and Rs 3 as platform fee when you recharge your SIM card, depending on the recharge value.
Certain aggregators also charge convenience fee or platform fee for credit/debit card bill payments and on card transactions for certain bill payments, such as water and electricity.
Mahroof, who runs a juice shop in Chennai’s Anna Nagar, said that he won’t use UPI if a transaction fee is introduced. “Around 75% of the transaction here is through UPI and most customers prefer it. As far as we are concerned we don’t want both parties (merchants and customers) to pay a transaction fee for UPI,” he said. He believes that it will impact his business.
Anthony, a gig worker in Chennai, said he will limit his UPI transactions if a fee is charged. “I’ll only use UPI if there is an emergency…if there is something like I can make up to 10 free UPI transactions per month, then I’ll make use of that… otherwise, it will definitely affect my income,” he said.
However, some users also said that they will continue using the UPI ecosystem even if a fee is introduced. Sriram, a 26-year-old engineer working in Bengaluru, said, “It’s just too convenient…I can send or receive money instantly anytime, without needing cash or going to the bank. Even if there’s a small fee it’s still faster and easier than other options. The time and effort it saves is worth a little extra cost or little fee.”
Going ahead, experts suggest that if the government wants to introduce a transaction fee, it should charge transactions above Rs 2,000, or increase the subsidy given to banks. “The best part would be to look at it as to not to charge to the smaller merchant, not to charge to the below 2k (Rs 2,000) merchant so that there is no impact on the volume of the transactions which are being driven… at the same time there is a cost which the bank incurs…they (government) will have to provide a subsidy to the banks and the payment aggregators so that they can manage the system the way they are managing it right now,” Jain said.
Notably, the share of transactions below Rs 2,000 remains higher in the UPI volume. In July 2025, 96% of the person to person (P2P) transactions were below Rs 2,000. It was 80% in the P2M segment.