The cost of free

UPI's exponential growth is straining the limits of subsidies. Merchant discount rate could present a sustainable revenue model

- AJINKYA KAWALE & SUBRATA PANDA

India's most successful digital payments story — the Unified Payments Interface (UPI) — is free for consumers but far from costless. As Reserve Bank of India (RBI) Governor Sanjay Malhotra recently reminded, someone is footing the bill, and for now, it is the government.

That raises a pressing question: how long can subsidies sustain UPI's explosive growth? The government wants transaction volumes to expand tenfold, but industry participants, including fintechs and banks, say the UPI ecosystem may be nearing a tipping point where technology and operational costs are difficult to absorb.

Several executives argue that UPI still has the potential to grow tenfold, but warn that the absence of a monetisation model risks stagnating the real-time payments system, which has been recording all-time-high transaction volumes every year.

In July, UPI processed a new high of 19.46 billion transactions worth ₹25.08 trillion. Of these, nearly two-thirds (63.63 per cent) were peer-to-merchant (P2M) payments; the remaining were peer-to-peer (P2P) transfers. In July, P2M transactions stood at 12.38 billion in volume and ₹7.34 trillion in value.

The industry cautions that without monetisation, sustaining this pace might prove difficult.

As a solution, the stakeholders have been pressing for the introduction of a merchant discount rate (MDR) on UPI P2M transactions. The proposal is simple: spread the cost across the ecosystem, with each stakeholder earning a share for supporting the infrastructure. Earlier this year, the Payments Council of India (PCI), which represents digital payment players, wrote to Prime Minister Narendra Modi seeking a 0.30 per cent MDR on transactions at large merchants.