The United Payment Interface (UPI) has been the archetype for real-time payments systems, but it could soon take a page out of the card payments playbook: merchant fees.
UPI has become the preferred payment method in India by offering instant, phone-based payments for consumers and fee-free transactions for merchants. However, some industry observers argue that the lack of merchant fees limits the network’s long-term sustainability by reducing incentives for payments providers to invest in infrastructure, innovation, and value-added services.
If investment slows, UPI’s rapid growth could begin to plateau—a possibility that India’s regulators may address through future policy changes, according to Reuters.
“This highlights the importance of merchants in the ecosystem of payments,” said Don Apgar, Director of Merchant Payments at Javelin Strategy & Research. “At first glance, making payments free for merchants to accept would seems like a great way to drive growth and expand the network, so in the early stages of market growth it’s a good strategy.”
“As the market matures and the technology advances, companies that merchants turn to for payments technology don’t want to include UPI if there is no revenue to be made,” he said.
Reversing the Flywheel
Merchant transaction fees have long been a cornerstone of the card payments ecosystem. While many retailers argue that these fees increase the cost of accepting payments, they have also helped fund ongoing investment in network infrastructure, security, fraud prevention, and product innovation.
“In the U.S. market, all of the tech companies that deliver POS platforms and other tech to merchants thrive because they are getting a portion of the fees that merchants pay to accept payments,” Apgar said.
“What happens when those fees aren’t there and the tech companies aren’t investing in UPI acceptance means that the customer experience will begin to degrade compared to other payment types. Once that happens, and the flywheel starts spinning the other way, it’s hard to reverse,” he said.
The Best of Both Worlds
These tradeoffs could drive India’s lawmakers to pursue a more targeted approach to merchant fees. For example, fees could apply only to transactions above a certain value or to larger merchants, while smaller businesses and low-value payments remain exempt.
This strategy could help preserve UPI’s accessibility while creating additional incentives for investment in the ecosystem.
“The nominal merchant fees being discussed create enough revenue potential to ensure that merchant-facing tech companies continue to advance acceptance tech for UPI, without unfairly burdening merchants with fees,” Apgar said.
