The Indian government's drastic cut in UPI incentives raises questions about the long-term sustainability of the country's digital payments infrastructure.
Despite record transaction volumes, the UPI system must consider implementing transaction fees to develop a viable revenue model for continued growth.
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Challenges Facing India's UPI System
India's UPI system, which has become integral to its digital economy, is facing significant challenges due to recent government subsidy cuts. The reduction of incentives from 5,500 crore rupees to merely 1,500 crore rupees raises questions about the sustainability of the platform’s current model, which relies heavily on government support without charging merchants transaction fees. Despite a record volume of transactions, the system's financial viability is jeopardized, leading industry experts to consider the introduction of a merchant discount rate. Such a move, though contentious, could help bridge the financial gap and ensure continued growth and stability in the digital payments ecosystem.
The Need for a Sustainable Revenue Model
The discussion highlights the critical need for UPI to develop a sustainable revenue model to secure its future, as current funding structures are becoming untenable. Introducing a modest fee on transactions could create necessary revenue, allowing banks and fintechs to invest in infrastructure, enhance security, and improve user services. While there is concern that fees might deter users, the existing reliance on UPI for everyday transactions suggests that users may accept nominal charges if accompanied by value-added features. Ultimately, the conversation prompts a reevaluation of how digital public goods like UPI can balance accessibility with financial sustainability, emphasizing that a robust revenue model is essential for the service's longevity.
On 19 March, the Indian government slashed incentives for UPI transactions by more than half to Rs 1,500 crore for FY25.
After it launched in 2016, UPI very quickly became the backbone of India’s digital economy–thanks to demonetisation, and well, the pandemic. Most importantly, it was the radical decision to keep it free that fuelled its growth. No merchant fees. No transaction costs. But the zero-MDR policy came at a price because payment processors lost more than 2500 crore last year alone. And with the new budget cut, it will get worse.
The system is clearly showing signs of strain.
While UPI continues to post record volumes—18 billion transactions in March alone—many are asking an uncomfortable question:
Can India maintain its digital payments miracle without letting the infrastructure collapse under its own weight?
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Do you think people will stop using UPI if there is a small fee involved?
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Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.
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