UPI: From scale to sustainability

If the volume of transactions is around Rs 30 lakh crore in a single month, then it isn’t just a matter of whether or not a transaction is zero cost. The larger question is who pays to keep the system secure, resilient and sustainable. This is what the latest decision by India on the Unified Payments Interface (UPI) means. The new Merchant Discount Rate (MDR) for the specified person-to-merchant (P2M) UPI transactions above Rs 2,000 will be 0.4 per cent with a cap of Rs 300 from Oct 15. Person-to-person payments and payments made by merchants till a limit of Rs 2,000 and under the zero-MDR formula for small merchants will continue to be free. The government’s current figures indicate that around 96 per cent of the P2M transactions will not be impacted. This is not a general consumer levy. MDR is a fee in the merchant-payment system which is shared among the entities involved. The question is: has it managed to keep pace with the unprecedented scale of UPI?

The economics behind ‘free’

UPI is now an integral part of the digital public infrastructure in India. NPCI data revealed transactions worth Rs 29.82 lakh crore from 752 banks through UPI in August 2026, meting out 24.51 billion transactions. This is a scale, but it’s not a costless scale. The payment system needs investment on a continuous basis. Cybersecurity challenges are new and growing, fraud prevention needs are more complex and sophisticated and banks and payment service providers must have resilient technology to meet the challenges. As transaction volumes increase, the process of resolving the disputes of the customer has to be carried out and interoperability must be maintained and systems upgraded. It seems there’s no cost to the user, but there is to the infrastructure. That is why the MDR debate needs to transcend the question of whether or not merchants should be charged. The bigger question is, has India made a sustainable economic and governance model of the digital public infrastructures?

From zero to differentiated cost

There are strong arguments to maintain the costs of all UPI transactions low. Digital payments are a cost-effective solution that can be promoted to drive adoption, limit reliance on cash and small businesses' access to the formal digital economy. The new framework takes into account that by protecting P2P payments and small-value merchant transactions, it will acknowledge this. The government’s design instead is to distinguish between various kinds of transactions, instead of having a general charge. It’s worth noting that distinction is significant. However, as a payment ecosystem starts to make money from specific transactions, transparency is also crucial. What will be the revenue of the system? How will it be applied? What changes can be expected in the infrastructure, fraud prevention and cyber-security?

When a payment system becomes critical infrastructure

UPI has ceased to be just another payment method. It’s a payment channel that’s now used by millions of consumers and businesses. This puts people in a new position of responsibility, which has a scope that goes beyond transaction processing. What would be the impact on a large-scale payment system if it went down? When there is fraud, who is responsible? How quickly the significant cybersecurity incidents are addressed? What if an unauthorized transaction occurs? Where to place the burden of continual upgrading of the infrastructure? With the increasing shift towards digital payments, these are now economic questions of resilience. Governance consequently has to shift from ‘transaction governance to ecosystem governance’. This will result in greater clarity of responsibility within the banking system, between banks and payment services providers and other actors, higher operational and cybersecurity requirements, more secure systems in case of failed or fraudulent transactions, and more transparency regarding payment system economics.

The missing key: accountability

The launch of MDR can contribute to the development of a more sustainable economic model for the UPI eco system. However, the price tag is not enough to achieve sustainability. More transparency of financing and strengthening of the ecosystem should be public. The system should be able to show the benefits of the merchant’s contribution when they are involved in MDR. These reports might include: the cost of the ecosystem, investments in resilience and technology, fraud patterns and enhancements to customer protection. This is not a matter of making all things UPI overly "bureaucratic" and "expensive". It’s a matter of understanding that this is a digital public infrastructure that needs institutional responsibility and efficiency.

Adoption was the first UPI challenge in India. Scale was the second one. Next is sustainability. The measure of success cannot be transaction volumes alone. A processing system with billions of payments needs to be secure when things go wrong, cyber-resistant, and flexible enough to meet the needs of the consumer and have the financial means to make technological advances. This new MDR framework may thus be the first step in a wider discussion on the funding and governance of UPI. The policy dilemma lies in making sure that reducing transaction costs is not at the expense of other long-term costs: system failures, fraud, cybersecurity risks, poor grievance redressal, and insufficient infrastructural investment.

The world has seen India prove that digital payments can be swift, seamless and so accessible at an unprecedented scale. The next demonstration should be that such infrastructure is also sustainable, resilient and accountable. The future of UPI should not be decided on the number of transactions it can process or the cost of individual transactions. A more significant question is whether India can keep the same affordability that led to the success of UPI and develop the governance structure for its sustained operation. The true cost of UPI is not just the cost of a transaction. It’s what India is ready to pay to maintain the system trusted.

The writer is Professor, Department of Commerce, CHRIST University; Views presented are personal.