Why UPI needs transaction fees

Taxation and Other Laws (Amendment) Bill 2026, passed by the Lok Sabha on Thursday, sets out the legal basis for UPI transactions to allow a merchant discount rate (MDR), a processing fee merchants pay to banks for transactions. In the absence of this provision, there was no scope to introduce transaction fees on the platform, which are vital for the development of the digital instant payments system. Over 95% of UPI transactions conducted are for less than ₹2,000, and are likely to remain exempt. The remaining, which account for more than 2/3rd of UPI transaction value, could benefit from the introduction of MDR by enabling the growth of value-added credit services. This is the next stage in the growth of any digital payments platform, and UPI should not surrender its enormous early lead to potential rivals in the pipeline.

This requires transparent and competitive pricing of transactions conducted over UPI. The scale of UPI allows banks to operate at low MDR levels compared with credit card networks. So, its intrinsic advantage is unlikely to be lost. Since UPI will have to link up with an international network of digital payments platforms - most of which charge fees - to facilitate cross-border transactions, a cap on MDR will create an effective moat. Additional revenue streams from credit services will also act as a drag on transaction fees. In its next avatar, UPI will have to compete on costs and services. The Bill just passed addresses both emerging realities while preserving the core strength of UPI by being free for small-ticket transactions.

The timing of the legal change is important, because around 100 countries have deployed, or are developing, their own instant payments platforms. It is time India switched to the majority approach of these platforms being built and managed through transaction fees, while holding on to the benefits of UPI's publicly funded digital infrastructure legacy, and ensuring its long-term financial sustainability and global competitiveness.