UPI’s Free Ride: Can it Last Forever? A Deep Dive into Payment Aggregators and Sustainability

[Shaashwat is a student at Hidayatullah National Law University.]

When India launched the Unified Payments Interface (UPI) in April 2016, it was presented as more than just any other payment app. It was a strategic building block of digital infrastructure designed to transform how money flows in the economy. It was developed by National Payments Corporation of India and ensures simple, instant and free 24*7 transfers between bank accounts available to anyone with a smartphone and internet connection. It is being stated that by July 2025, UPI was processing over 18 billion transactions a month, making it the world's largest real-time payment system by volume. For a country that has historically been heavily reliant on cash flow, this growth has sparked a payment revolution, transforming the nation’s financial infrastructure into a globally admired model.

However, it has its challenges, and the most pressing debate is its zero Merchant Discount Rate (MDR) policy. In January 2020, the government instituted a zero-fee model for UPI transactions to drive adoption and mandated that consumers would not face any transaction fees either. But free services are not truly free. The burden falls on banks, payment service providers, and fintech companies that invest in cybersecurity, infrastructure, compliance measures, and fraud detection required for UPI’s uninterrupted performance. Without MDR value, these entities rely on cross-subsidization from government or other sources to sustain operations. In other countries, most payment apps, such as VisaNet, operate with a fee structure that helps recover the cost and incentivizes innovation.

Through this post, the author explores the above issue of free rider problem, placing the onus on payment aggregators. It concludes by comparing the Indian model with global policies, highlighting how other jurisdictions have introduced differentiated fees for public digital goods, which usually charges large business alongside keeping small retailers free.

Free to Use, Priceless in Impact- How Zero Fees Powered a Payment Revolution

The success of UPI can be attributed to the pivotal policy decision to abolish the MDR for transactions. Before the MDR waiver, online payments involved charges that deterred small businesses, local vendors from adopting such cashless transactions. MDR’s abolition significantly reduced the cash hurdle and exponentially accelerated the onboarding of vendors and small businesses in semi-urban and rural areas. This decision has created a vibrant inclusive digital payment ecosystem that today accounts for billions of real-time transactions every month. This exclusive growth in transaction volumes demonstrates the positive effect of the zero MDR policy, which encouraged billions of users. Beyond accessibility, the zero-fee model also delivered numerous additional dividends, propelling financial inclusion by bringing low-income and erstwhile unbanked segments into the formal financial system. It catalyzed cash displacement and reduced excessive reliance on physical currency, simultaneously mitigating the environmental impact.  And further transformed the dynamics for Indian payments, opening the door for businesses to connect with customers in a whole different and simple manner. Accompanied by its best feature, interoperability, transferring money from one bank to another, entirely distinct jurisdiction within seconds, 24*7.

The Hidden Cost Behind the Free Ride: Who Pays?

The UPI’s free model accelerated the digital adoption, but shifted the burden onto banks, payment service providers, and fintech companies, who are compelled to absorb the operational costs. These include cybersecurity, technology infrastructure, fraud detection, consumer compliance measures, and support.  The traditional payment networks, such as Visa or Mastercard, generate revenue through MDR; however, UPI-based entities heavily rely on cross-subsidization. That might raise sustainability concerns as the current model puts a significant burden on small retailers who lack a diversified revenue stream. Payment aggregators are vital for onboarding merchants and facilitating transactions that face shrinking margins which raises questions about their long-term viability. Recently, Reserve Bank of India governor Sanjay Malhotra addressed concerns regarding the UPI. He added, while the UPI remains free for the end users, operational costs are incurred in the smooth running of the system, and it cannot be free indefinitely, and emphasized that someone must bear the cost involved. From a policy point of view, it raises crucial questions, whether UPI shall continue to be treated as a public digital good similar to printed currency, or should adopt policies akin to Singapore's (PayNow), UK’s (Faster Payments), which takes nominal transaction fees for certain user categories to help sustain infrastructure without undermining adoption.

Economic Trade-offs of the Zero-MDR Model: Global Comparisons

Globally, many countries have adopted fast payment systems that appear free to consumers but rely on behind-the-scenes cost recovery. Like, the USA’s FedNow and Zelle operate real-time payment services through public and private channels. FedNow is a public infrastructure for instant payment between banks, while end users typically pay no charges, participating financial institutions are charged pre-transaction and monthly access fees to recover operational costs. Singapore’s PayNow offers free peer-to-peer transfers for consumers, meanwhile, permits a certain nominal fee for corporate or value-added services, making sure that the small retailers can be priced differently. The UK’s Faster Payment System is largely free for retail customers, but charges monthly connectivity charges and per-transaction fees to cover central infrastructure and connectivity fees for underwriting systems operation. Brazil’s Pix offers, forthwith, low-cost transfers for individuals while permitting differentiated pricing for business services, a policy that has sustained widespread adoption while creating room to recover costs from commercial users. In contrast, UPI enshrines the zero-MDR principle, pushing burdens on payment aggregators, banks, etc. This policy maximized adoption and inclusion but has increased reliance on cross-subsidies and the operational willingness of participating institutions.

Way Ahead: Navigating the Future of Zero-MDR Payments

UPI serves as a model for public digital infrastructure, not a profit-driven payment network like Mastercard or Visa. This system works similarly to currency issuance, just as the RBI does not charge citizens for printing and distributing cash. UPI is best understood as a strategic and enabling tool that is already paying for itself via wider economic formalization and enhanced tax collection. Looking at it from a profit-motive lens distorts its primary purpose and overlooks the broader societal returns generated by the platform. There is a positive correlation between UPI operational use among small and medium enterprises and elevated tax compliance, suggesting that digital payment fosters formalization within the economy, boosting tax compliance and government efficiency. International Monetary Fund analysis showcases how the swift growth of UPI has contributed to improving transaction transparency and reducing cash dependency across the whole nation, with the outcome of systematic economic benefits. Consequently, UPI’s value proposition extends well beyond mere convenience, but as a tool for economic modernization and governance reform. 

Still, the challenge of economic sustainability cannot be overlooked. Preserving robust infrastructure, operational resilience, innovation, cybersecurity etc. requires constant and sustainable funding. However, the solution does not lie in imposing blanket fees that hinder financial inclusion but in a differentiated hybrid funding model. This approach would offer zero charges for low-value person-to-person transactions, while permitting a nominal charge in high-value or commercial transactions. Such a differentiated pricing system has proven effective in several countries, such as Brazil’s Pix system charges a business fee while keeping individual transactions free. Similarly, Singapore’s PayNow imposes a fee selectively and preserves its widespread adoption. This balanced model aligns with principles of efficiency and equity, puts onus on entities with greater ability to pay alongside protecting the small retailers and vulnerable segments. Moreover, a hybrid model provides a stable revenue stream for the development of rudimentary infrastructure and security enhancements, making sure the adaptability and durability of UPI transaction volume continue to grow.