Users making large payments to merchants through UPI could soon face a new fee, with regulators reportedly considering a charge of around 0.4% on such transactions. The proposed rate is part of consultations involving the National Payments Corporation of India (NPCI), banks and payment companies, with the final fee and its distribution across the payments ecosystem yet to be decided.

The discussions come shortly after the government clarified that UPI transactions of up to Rs 2,000 cannot be charged by banks or payment system providers. The proposed framework would potentially leave smaller UPI payments free while introducing charges for certain larger person-to-merchant (P2M) transactions.

0.4% Fee Being Considered For Large Payments

Regulatory authorities, including NPCI and the Reserve Bank of India, are leaning towards a 0.4% fee for larger UPI merchant payments, according to one of the sources cited by Reuters. If that rate were implemented, a Rs 5,000 payment would attract a fee of Rs 20, while a Rs 10,000 transaction would incur Rs 40.

A Rs 50,000 merchant payment, meanwhile, would attract a fee of Rs 200 at the proposed rate. These are only indicative calculations based on the 0.4% figure, which has not been finalised.

The consultation includes discussions on the overall fee for merchant transactions and how any revenue generated would be divided between banks, payment applications and merchant payment service providers. One proposal cited by Reuters would give banks 40% of the fee, with the remaining 60% divided equally between the payment app and merchant payment service provider.

Under that model, the potential distribution would be 40:30:30 between banks, payment apps and merchant payment service providers. However, the structure remains under discussion and no final decision has been taken.

Most UPI Users May Not Pay Directly

The proposed change would not mean that every UPI transaction becomes chargeable. According to the Reuters report, the proposed monetisation is focused on person-to-merchant payments, while peer-to-peer transfers between individuals are expected to remain free.

This means a transfer from one individual to another could continue without a fee, while a large payment made by a customer to a merchant could potentially attract a charge. The government had previously indicated that any future merchant discount rate (MDR) on UPI would be nominal and apply only to a limited category of merchant transactions.

The government’s notification on Monday specified that banks and payment system providers cannot charge for UPI transactions of up to Rs 2,000. It also protects payments made through RuPay-powered debit cards from such charges.

The clarification effectively leaves scope for a separate charging mechanism for larger transactions. A detailed operational framework would determine which payments are covered and how the proposed fees are collected and distributed.

UPI transactions have remained free since 2020 as part of efforts to encourage digital payments. Any move to monetise a portion of the system would therefore represent a significant change in how India’s largest retail digital payments network is funded.

UPI Scale Makes Fee Decision Significant

The potential financial impact of the proposal is substantial because of the enormous volume of transactions processed through UPI. The system handled around 24 billion transactions worth USD 311 billion in August alone.

With billions of payments passing through UPI every month, even a relatively small fee on a portion of merchant transactions could generate significant revenue for banks, payment apps and other companies in the ecosystem. Jefferies estimates that merchant fees on larger UPI transactions could generate between Rs 5,000 crore and Rs 10,000 crore annually for the payments industry, according to the report.

Payment Companies Could Gain New Revenue

A charging mechanism for larger merchant transactions could also create an additional revenue stream for payment companies. The proposed model could benefit firms such as Paytm and Pine Labs, while potentially improving the revenue outlook for IPO-bound PhonePe and Razorpay.

India’s UPI payments market is dominated by applications including Walmart-backed PhonePe, Google Pay, Paytm and Meta-backed CRED, according to Reuters. PhonePe and Google Pay account for a large share of UPI transactions, making the eventual fee structure particularly important for major digital payments platforms.

The next step will be for NPCI and other stakeholders to settle the final structure. Neither the proposed 0.4% rate nor the suggested 40:30:30 revenue split has been approved.

For now, UPI payments of up to Rs 2,000 remain free under the government’s latest notification. But the ongoing consultations indicate that larger merchant payments could soon become part of a monetised segment of the UPI ecosystem, potentially marking a new pricing model for high-value transactions nearly a decade after UPI’s launch and more than six years after MDR on UPI was set at zero.

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