Turns out someone has to pay for free UPI | Daybreak | The Ken

Summary

UPI, India's digital payments system, has revolutionized the country’s economy since 2016, offering free transactions for users and merchants. However, recent cuts in government subsidies raise concerns about its long-term sustainability. The platform's low-value, high-volume structure is putting a strain on the system. To ensure UPI’s future, introducing a Merchant Discount Rate (MDR) could be the solution, although it faces resistance. With billions of transactions, UPI needs a sustainable model to support infrastructure, cybersecurity, and credit inclusion. The real question is not whether UPI should charge fees, but whether it can survive without them.

Takeaways

• 😀 UPI's government incentives have been slashed by over half for the financial year 2025, signaling a shift in subsidy support.
• 😀 UPI has evolved from just a payments platform to the backbone of India's digital economy, benefiting from government policies and private players.
• 😀 The policy of zero Merchant Discount Rate (MDR) led to significant financial losses for payment processors, exceeding 2,500 crore rupees in FY 2024.
• 😀 UPI's growing transaction volume is not enough to sustain the infrastructure costs, with a financial gap of at least 6,000 crore rupees in FY 2024 alone.
• 😀 The idea of reintroducing MDR (merchant fees) is being discussed, despite resistance from merchants who fear it will push customers back to cash transactions.
• 😀 Introducing a well-designed MDR policy could raise over 36,000 crore rupees and eliminate the need for government subsidies, ensuring long-term financial sustainability.
• 😀 The introduction of MDR could spur more competition in underserved areas, such as tier 3 towns and rural regions, accelerating digital payments adoption.
• 😀 UPI is showing signs of strain, including system outages and increasing fraud, highlighting the need for more investment in cybersecurity and infrastructure.
• 😀 Online payment fraud increased by 85% in FY 2024, with UPI being a prime target, necessitating real-time fraud detection and improved security measures.
• 😀 Introducing MDR could unlock additional features and services for merchants, such as analytics, inventory tracking, and multilingual support, enhancing UPI's value.
• 😀 Despite fears that fees might drive users away, the reality is that UPI has become a habit, and small charges are unlikely to disrupt its widespread usage or merchant adoption.

Q & A

What is the main issue being addressed in this transcript about UPI?

The transcript addresses the sustainability of UPI (Unified Payments Interface) in India, focusing on the reduction of government subsidies, the resulting financial gap, and the potential reintroduction of Merchant Discount Rate (MDR) to keep the system operational and sustainable.

Why did the Indian government reduce UPI subsidies in 2025?

The Indian government reduced UPI subsidies in 2025 from 5,500 crore rupees to 1,500 crore rupees as part of fiscal adjustments. This reduction reflects a shift in the government's approach to supporting UPI, which had previously relied on generous subsidies to cover operational costs.

What are the types of UPI transactions discussed in the transcript?

The transcript discusses two types of UPI transactions: merchant transactions (payments to businesses) and peer-to-peer (P2P) transactions (payments between individuals, such as rent or tuition fees).

What is the average value of UPI merchant transactions compared to peer-to-peer payments?

The average value of UPI merchant transactions is around 636 rupees, while the average value of peer-to-peer transactions is about 2,744 rupees. This shows an imbalance in transaction volumes and values.

Why is the financial gap in the UPI system growing?

The financial gap is growing because UPI transactions are mostly low-value, high-volume merchant transactions that don't generate enough revenue to cover operational costs. The government subsidies that once covered the difference are being slashed, leaving a widening gap.

How does the introduction of a Merchant Discount Rate (MDR) help the UPI system?

Introducing an MDR would help generate revenue to cover the operational costs of UPI. It would allow banks and fintech companies to earn a small fee per transaction, which could reduce the dependency on government subsidies and make the system financially sustainable.

What challenges exist regarding the reintroduction of MDR in India?

There is significant resistance to introducing MDR in India due to fears that it would push users and merchants back to cash transactions. Merchants, in particular, are concerned that even a small fee would impact their business and customer engagement.

How could the introduction of MDR benefit the broader UPI ecosystem?

Introducing MDR could incentivize competition among banks and fintechs, encouraging them to serve underserved areas, improve services, and invest in better infrastructure. It could also help address the growing concerns around security, fraud prevention, and customer support.

What impact did the March 2024 UPI outage have on the system?

The March 2024 UPI outage, which left millions stranded, highlighted the system's vulnerabilities. It resulted in 23,000 customer complaints and emphasized the need for improved infrastructure and real-time fraud detection to ensure UPI’s reliability and security.

What role does UPI play in financial inclusion in India?

UPI plays a crucial role in financial inclusion by enabling millions of Indians to make digital payments easily. Financial inclusion efforts like Jan Dhan have brought more people into the banking system, and UPI can help serve this population with greater access to digital payments and credit facilities.