India’s Unified Payments Interface (UPI), the free digital‑payment network used by more than 500 million people, will start charging merchants a 0.4% fee on transactions above 2,000 rupees (about $21) beginning October 15. The change, approved by regulators last week, creates a new merchant discount rate (MDR) that analysts expect to generate up to $1.1 billion in annual revenue for payment‑app providers by March 2028.
Dominant apps poised to reap the bulk of new income
PhonePe, backed by Walmart, and Google Pay together handled roughly 80% of UPI payment value last month. Based on their market share, the two firms could capture about $900 million of the projected MDR pool. “The introduction of MDR is a positive step towards offsetting substantial operational costs and liabilities,” said Rahul Chari, co‑founder of PhonePe.
The fee shift marks a departure from the six‑year period during which UPI operated as a free service. That free model helped drive rapid adoption after India’s 2016 demonetisation, the COVID‑19 pandemic and aggressive customer incentives. By moving toward a fee‑based structure, UPI aligns more closely with global retail‑payment systems such as China’s Alipay, Singapore’s PayNow and Brazil’s Pix, where merchant fees range from 0.6% to 1.5%.
Potential rural expansion for the incumbents
Industry sources familiar with internal discussions say the new revenue stream could make it financially viable for PhonePe and Google Pay to push deeper into rural India, a market that has previously been less attractive due to smaller transaction sizes. Access to richer transaction data would also enable the firms to offer tailored loans and other financial products, further expanding their revenue base.
Google Pay declined to comment, while PhonePe did not disclose specific expansion plans. Both companies, however, are expected to leverage the MDR earnings to strengthen their presence outside major urban centres.
Smaller rivals face a tougher landscape
Smaller UPI players are likely to shift focus toward higher‑value transactions such as ticket bookings, business payments and utility bills, while also expanding credit‑offering capabilities on the platform. “Now I can give a direct reason to my team why we should continue to invest and grow the UPI ecosystem,” said Bipin Preet Singh, co‑founder of MobiKwik, which ranks 15th among UPI apps.
Venture‑capital investors caution that the reform arrives late and appears skewed toward the dominant firms. “It might on the margins help smaller players with existing distribution, but the largest benefits are likely to accrue to large firms like PhonePe or Google Pay,” observed Joseph Sebastian, vice president for investments at Blume Ventures.
Merchants’ response and consumer impact
Regulations prohibit merchants from explicitly passing the fee on to customers, but industry executives expect some indirect pass‑through. Nonetheless, analysts, the Indian central bank and several retail merchants interviewed in Mumbai believe a shift back to cash is unlikely.
Govind Rawal, manager of a large clothing retailer in Mumbai’s Dadar area, said about 80% of his shop’s daily revenue flows through UPI and he does not plan to raise prices. “Customers are too used to UPI and the cost is quite small, so it doesn’t make much difference,” he explained.
Mahendra Vishnoi, a 31‑year‑old shopper in another Mumbai neighbourhood, expressed hope that merchants would not increase prices. “The fees shouldn’t keep rising in the future though. If it stays where it is for a few years, it should be fine,” he said.
Regulatory outlook
The National Payments Corporation of India (NPCI), which operates UPI, has previously deferred a decision on imposing a 30% market‑share cap for the platform. The new fee structure may prompt regulators to revisit dominance concerns, especially as PhonePe and Google Pay gain additional firepower.
Overall, the MDR policy is expected to reshape India’s digital‑payments landscape, rewarding the dominant incumbents while challenging smaller competitors to adapt their business models.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
