India built the world's biggest digital payments miracle. Now comes the bill

Image source, NurPhoto via Getty ImagesImage caption, A vegetable vendor waits for customers at a market in Kolkata, with a QR code displayed for digital paymentsFor most Indians, paying by Unified Payments Interface (UPI) has become almost absurdly routine.Scan a QR code, tap a few buttons and the money moves instantly. There is no card machine, no cash, and - most importantly - for the user, no visible fee.That may be about to change.India has paved the way, external for banks and payment companies to charge merchants a fee on UPI transactions, potentially ending a decade-long experiment in free digital payments. The government has yet to decide the rate or exactly where it will apply, but proposals under discussion include a merchant discount rate (MDR) of 0.3-0.5% - a small fee paid by a business to the banks and payment companies that process its UPI payments - on larger transactions at big businesses.The government says, external consumers and person-to-person UPI payments will remain free. If merchant fees are introduced, they will apply only to some transactions above a set threshold, at a nominal rate, meaning most UPI payments will remain free.The question is whether putting a price on UPI could weaken the network that made it such a success.The stakes are enormous. Launched in 2016, UPI has grown into one of the world's biggest real-time payment networks. Image source, LightRocket via Getty ImagesImage caption, A man stands beside a horse fitted with a payments QR code near its eye, allowing riders to pay digitally after a beach rideAccording to official data, in July alone, there were 23.6 billion UPI transactions worth 29.87 trillion rupees ($313.5bn; £232.2bn). Fintech apps such as PhonePe and Google Pay account for most UPI payments. In the financial year just ended, the figure was about 241.6 billion transactions - almost 12,000 times the volume in UPI's first full year. More than 550 million people now use it, external, and the system is now available in some form for payments in 11 countries outside India.UPI is not merely big. Its design is unusual. Rather than building a closed system around a single dominant app, India created common digital plumbing on which competing companies could operate. Google Pay and PhonePe can fight fiercely for customers while still allowing their users to transact across the same network. The system is run by the National Payments Corporation of India, a non-profit entity, with banks and technology companies providing the consumer-facing services.But one of the less glamorous ingredients in the UPI story may now be the most important: merchants.A vegetable seller, taxi driver or small shopkeeper does not need to buy a card terminal to accept UPI. A printed QR code will do. And because merchants have not had to pay MDR, there has been little financial reason to turn customers away.Image source, NurPhoto via Getty ImagesImage caption, A woman scans a QR code after buying vegetables at a market in KolkataNew research by economists Abhinav Motheram and Sharon Buteau suggests that this merchant network was not merely an effect of UPI's success. It helped drive it."Our study suggests that merchant acceptance is not just a result of UPI growth, but one of its key drivers," Motheram says. Districts with stronger merchant networks tended to see higher UPI adoption. "If charges are limited to large merchants or higher-value transactions, the effect on broad-based adoption may be modest. But if they reach small and informal merchants, especially in districts where acceptance networks are still developing, they could slow the merchant expansion that has helped UPI scale," he says.The immediate proposal is designed to minimise that risk. One option reportedly under discussion would target transactions above 2,000 rupees at larger merchants, leaving small businesses and low-value payments untouched. Transactions above that threshold account for only about 4% of merchant-payment volumes but roughly 67% of their value, according to brokerage firm Jefferies. That could generate a sizeable new revenue stream - up to a billion dollars, by one estimate, external - for banks and payment companies while leaving the everyday smaller payment to the neighbourhood grocer effectively unchanged.It also addresses a problem that is becoming harder to ignore. UPI may feel free, but it is not costless. Image source, NurPhoto via Getty ImageImage caption, Even street food vendors accept digitial payments in IndiaServers have to run, transactions settled, fraud detected and the system protected against cyberattacks. For years, the government has helped compensate banks and payment firms for providing a service that has effectively been treated as public infrastructure.As Sanjay Malhotra, governor of the Reserve Bank of India (RBI), the country's central bank, recently put it: "Someone will have to pay the cost."But the economics become trickier the further down the merchant chain a fee travels.Motheram's research does not estimate precisely how sensitive merchants are to MDR. But it offers a warning against assuming that a small fee will have a small effect."Even a small fee could matter if it changes the incentives of small merchants operating on thin margins," he says. The effect, he argues, depends heavily on the design of the charge. A fee imposed on a large retailer is very different from one imposed on a tiny shop or informal trader.That distinction matters because UPI's extraordinary growth was not simply a story about Indians getting smartphones. It was also a story about millions of businesses acquiring the ability - and the incentive - to accept digital payments."If charges are limited to large merchants or high-value transactions, the risk to mass adoption is likely lower," Motheram says. "The bigger concern would be if charges eventually reach small and informal merchants in less-developed districts, where merchant networks are still thin and adoption is still maturing."Image source, NurPhoto via Getty ImagesImage caption, More than 550 million Indians use UPI for digital payments India therefore faces a delicate balancing act. It wants to make UPI financially sustainable without disturbing the conditions that helped make it ubiquitous.It is not an impossible task. Brazil's Pix, another hugely successful instant-payment system, is free for individuals but permits low-cost charges for businesses. Yet it is the world's fastest-growing real-time payment system,, external used by more than 140 million people and 14 million companies, with more than four billion transactions a month averaging about $88 each."The key question is not simply whether UPI should remain free for every merchant transaction," Motheram says, "but whether the pricing structure protects the marginal merchants who are still being brought into the digital payments ecosystem."That may be the real test of India's next UPI experiment.The first phase was about creating the network. The second was about getting hundreds of millions of people and millions of merchants onto it. The third is now beginning: figuring out how to pay for the system without making it less useful.Economist Renuka Sane believes the right pricing structure could finally restore "commercial sanity", external to India's digital payment rails, allowing the market to price risk, fund critical infrastructure and build a more resilient payments ecosystem.The bigger risk may not be that Indians suddenly abandon UPI because a large retailer is charged a fraction of a percentage point: experts say its network effects are now too powerful for that. But there is a potential perception problem: a 2024 survey by polling agency LocalCircles found that 75% of UPI users said they would stop using it if transaction fees were introduced, while only 22% said they would be willing to pay.The risk is subtler. If charging merchants makes some of them less enthusiastic about accepting UPI - or eventually discourages the smallest ones from joining - the network could begin to lose some of the frictionless quality that made it so successful.