The Economics Behind India’s Unified Payments Interface

Each morning millions of Indians leave home with only a phone, confident a thumb-tap will cover chai or cab fare. Cash is now an afterthought; UPI’s two-second rail feels automatic. But the “free” miracle rests on a single switch and a shrinking subsidy. Government reimbursements fell from ₹3,631 crore in FY 2023-24 to ₹1,500 crore this year even as monthly volumes topped 19 billion. Each rupee now underwrites ten times the traffic it once did, shifting costs to banks and making the next nationwide outage a matter of when, not if.

Unified Payments Interface at Planetary Scale

India’s UPI now handles 19.47 billion payments a month—₹25.08 trillion in July 2025 alone. That is 35 percent more transactions than a year earlier and roughly 85 percent of all digital payments nationwide. 

Behind the tap-and-pay ease sits a deceptively lean architecture:

• National Payments Corporation of India (NPCI), a not-for-profit set up by the RBI and Indian Banks’ Association under the Payment and Settlement Systems Act 2007, owns the lone UPI switch, sets standards and routes every transaction in under two seconds.

• More than 680 banks ride the rails, absorbing risk and dispute costs while paying NPCI a 0.02 percent switch fee.

• Third-party apps—from the early trio of PhonePe, Google Pay and Paytm to today’s tail of SuperMoney, Navi, POP UPI and others—power the front end, driving 628 million payments a day.

The feat is striking for a lower-middle-income country that, in under a decade, built cloud-native public rails able to clear value equal to the annual GDP every five months. Yet success is straining the plumbing: technical-decline rates have breached the RBI’s 1 percent ceiling and peak-hour outages are climbing—early tremors in a network that has become indispensable.

Zero-Merchant Discount Rate Policy

India scrapped merchant discount rates on almost all RuPay-debit and UPI payments from 1 January 2020 to pull kirana stores and hawkers online. To soften the blow, the Centre created a reimbursement pool for each person-to-merchant transaction. The fund peaked at ₹3,631 crore in FY 2023-24 but is budgeted at just ₹1,500 crore for FY 2024-25—even as UPI now clears 19 billion transactions a month. Each rupee must therefore stretch across orders of magnitude more volume, leaving a widening shortfall.

Banks shoulder heavier costs—cloud servers, cyber-security, fraud monitoring and 24×7 dispute desks. The strain is visible: from 1 August 2025, ICICI Bank began charging payment aggregators a 2–4 basis-point “transaction-handling” fee, echoing earlier moves by Yes Bank and Axis. Consumers are spared for now, but the surcharge signals MDR’s quiet return and underscores one truth: someone must pay to keep UPI’s lights on.

The Economics for Banks & FinTechs

Zero MDR keeps the front end free but leaves the plumbing unfunded. Each UPI hit costs issuers and acquirers an estimated 3–4 basis points once switch fees, infrastructure, fraud analytics and support are counted. Multiply that by 600 million payments a day and the math turns sharply negative: volumes climb, revenue does not.

Fintech apps feel the squeeze differently. With payments commoditised, they spend on rewards and marketing to defend share, hoping to monetise users elsewhere. Main revenue levers include:

• Embedded credit and pay-later loans that earn interest and referral fees

• Bill-pay and recharge commissions on utilities and mobile top-ups

• Advertising and data-driven cross-sales—insurance, mutual funds, co-branded cards—built on the histories of 400 million-plus users

• Merchant services such as loyalty programmes or point-of-sale subscriptions with small recurring fees

These sidelines are growing but do not fund the rails. Until UPI earns a sustainable fee, every extra billion taps widens rather than narrows the ecosystem’s deficit.

The New Umbrella Entity Question: Stillborn Safety Net?

In August 2020 the RBI released its NUE framework, inviting well-capitalised consortia to build retail-payment networks alongside UPI, IMPS and RuPay to dilute systemic risk. Six groups—Tata-HDFC-Flipkart’s Ferbine, Reliance-Google-Facebook’s SoHum and four others—applied by March 2021.

Licensing has since stalled. The RBI deemed proposals too close to NPCI’s model and not innovative enough, while applicants balked at the required ₹500 crore paid-up capital in a zero-MDR regime with no clear revenue path.

With no NUE authorised, NPCI remains the sole real-time retail switch—a triumph, but also a single point on which 19 billion monthly payments rest. RBI Governor Sanjay Malhotra put it starkly in July 2025: “There are costs, and these costs have to be paid by someone… the government is subsidising it, but somewhere the costs are being paid.”

The issue is not NPCI’s performance; it is the absence of the backup network envisioned five years ago, leaving concentration risk—and the funding question—squarely in place.

Lessons from Brazil

Brazil’s Pix rail is often held up as the reference case for marrying mass-scale adoption with long-run financial self-sufficiency. Three design choices stand out:

• Brazil’s Pix keeps person-to-person transfers free, but it permits payment providers to charge merchants a tightly capped fee of 0.1 to 0.3 percent per transaction—about one-tenth of the typical merchant discount rate for domestic card payments.

• The Central Bank of Brazil operates the entire real-time switch in its own data centres, eliminating dependence on private vendors and cutting per-transaction operating costs. Private banks compete on the quality of their customer interfaces, while the central bank carries the responsibility for systemic-risk oversight.

• A service-level agreement requires that transactions settle within 0.6 seconds at least half of the time and within 1.2 seconds in 99 percent of cases. Financial penalties apply to institutions that fail to meet these targets, which helps keep processing times low even as monthly volumes have risen above five billion transactions.

For India, the lesson is structural, not numerical: adopt a narrow, transparent merchant levy, keep low-value P2P truly free through usage caps, and rely on regulator-run cloud rails to compress operating costs. Affordability and sustainability can coexist without dimming UPI’s two-second experience.

Growth Levers on the Horizon

With subsidies in retreat, the search for new revenue handles is no longer optional. Two are especially promising:

• CBDC–UPI interoperability is set to link the digital rupee directly to the existing UPI quick-response-code network. Once live, shoppers will scan the same code whether they pay from a bank account or a CBDC wallet, so merchants will not need new hardware or separate signage. Because these payments settle on the Reserve Bank’s own ledger, the operator can levy a tiny “settlement-guarantee” charge. That steady trickle can finance the extra servers, cyber-security measures and testing the new rail demands without adding any visible cost for customers.

• Cross-border UPI licensing is the second growth lever. NPCI International has already taken UPI live in France, the United Arab Emirates and Nepal, and talks with Namibia and Mauritius are under way. Each payment routed through these overseas switches yields a small routing fee of two to four basis points, creating a fresh stream of international revenue. By making remittances cheaper and more convenient, the initiative tightens links with the Indian diaspora and strengthens UPI’s reputation as a trusted global brand, reinforcing its long-term resilience.

Taken together, these missing pieces speak directly to sustainability: each adds either volume or a new fee point, but the tariffs must fit into a single, transparent, durable pricing model.

Conclusion

UPI has reached national-utility scale, moving money faster than traffic can keep up, but its economics still run on borrowed fuel. Shrinking subsidies, new bank surcharges and a stalled NUE licence all signal an overdue reckoning: “free” cannot fund resilience. India must swap implicit cross-subsidy for an explicit, paise-level tariff—ideally a narrow merchant levy that safeguards zero cost for low-value P2P and retains the daily ₹500–₹1,000 free band rural users rely on for wages and welfare. Those limits are not a concession; they are the on-ramp for kirana shops, SHG members and migrant families who would otherwise revert to cash. Until the revenue pipe matches the volume pipe, every extra billion taps deepens systemic risk. The next glitch will test whether policymakers can fix funding before India’s newest savers lose faith in tap-to-pay.

References

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6. Sahu, P., & Dash, S. (2021). Unified Payments Interface (UPI): A payment solution designed to transform economies of the 21st century [White paper]. National Payments Corporation of India. https://www.npci.org.in/PDF/npci/knowledge-center/partner-whitepapers/Unified-Payments-Interface-(UPI)-A-payment-solution-designed-to-transform-economies-of-the-21st-Century.pdf

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