UPI Transaction Fees: 75% of Users May Quit, Survey Says

Introduction to the UPI Fee Debate

A new survey from LocalCircles indicates that approximately 75% of Unified Payments Interface (UPI) users in India might discontinue using the service if transaction fees are implemented. This finding raises significant concerns about the future growth of the country's dominant digital payments system, which processed around 800 million transactions daily in March 2026. The resistance to charges has grown, up from 73% of users who opposed fees in a similar survey in 2025. As UPI nears the milestone of one billion daily transactions, the debate over its financial sustainability has intensified, pitting user expectations of free services against the operational costs of the ecosystem.

Understanding the Merchant Discount Rate

The central point of discussion is the Merchant Discount Rate (MDR), a fee that merchants pay to banks and payment service providers for processing digital transactions. In 2020, the government mandated a zero-MDR policy for UPI and RuPay debit card transactions to encourage widespread adoption. However, a parliamentary committee recently recommended reintroducing a graded MDR to ensure the long-term financial viability of the UPI platform. This recommendation aligns with a long-standing demand from the payments industry, which argues that a sustainable revenue model is essential for continued growth and innovation.

User Sentiment and Potential Impact

The survey highlights extreme price sensitivity among UPI users. In a high-frequency, low-ticket ecosystem, even a nominal charge could trigger significant behavioural shifts. The average UPI transaction value has decreased from ₹1,662 in FY23 to ₹1,330 in the first quarter of FY26, underscoring its use for small, everyday purchases. The report suggests that introducing fees could push a large number of users back towards cash, potentially reversing the progress made in digital financial inclusion. The survey found that only 25% of users would be willing to continue using UPI if charges were imposed.

Merchant Behavior and Existing Friction

Even under the current zero-MDR regime, the system is not entirely without friction. The LocalCircles survey revealed that 57% of users encountered at least one instance in the past year where a merchant refused a UPI payment and requested cash instead. Nearly 19% of respondents reported that such refusals happened frequently. This indicates that some merchants already perceive operational challenges or costs associated with digital payments, a sentiment that could be exacerbated by the formal introduction of an MDR, regardless of how small.

The Unsustainable Economics of Zero-MDR

Payment companies, banks, and fintech firms have consistently warned that the zero-MDR model is financially unmanageable. According to discussions referenced by the Reserve Bank of India, each UPI transaction costs approximately ₹2 to process. This cost is currently absorbed entirely by the banks and payment platforms, creating a significant financial burden. PhonePe, India's largest UPI platform, has stated that the ecosystem urgently needs a predictable cost-recovery mechanism to survive at scale. The financial strain threatens to stall rural expansion, curtail innovation, and undermine the government's goal of bringing the next 300 million Indians into the digital payments fold.

Government Incentives vs. Real Costs

The gap between government support and the actual cost of running the UPI network is widening. While the industry's cost to maintain the zero-MDR policy is projected to be substantial, government allocations for digital payment incentives have been comparatively low. This disparity highlights the unsustainability of relying solely on government subsidies to fund one of the world's largest real-time payment systems.

A Proposal for a Graded MDR

To address the sustainability issue, the Payments Council of India (PCI) has proposed a more nuanced approach. The industry body has requested the government to allow a controlled MDR of 0.3% on UPI transactions above ₹2,000. This fee would apply only to merchants with an annual turnover exceeding ₹20 lakh. The rationale is that high-volume businesses can absorb a nominal fee, which would help fund the ecosystem without impacting small merchants or low-value transactions. This two-tiered approach aims to balance financial viability with the goal of continued financial inclusion.

Are All UPI Transactions Currently Free?

It is a common misconception that all UPI transactions are entirely free. While direct bank-to-bank UPI transfers carry a government-mandated 0% MDR, charges can apply in other scenarios. For instance, when a UPI payment is made using a RuPay Credit Card, an MDR of approximately 1.1% to 2% is applicable because it involves bank-funded credit. Furthermore, merchants often pay a separate platform fee to their payment gateway provider for services like processing, security, and settlement. These existing costs are often invisible to the end consumer but are part of the payment ecosystem's operational reality.

Will Fees Derail UPI Adoption?

Despite user apprehension, some industry experts believe that a carefully implemented MDR will not be a death knell for UPI. The argument is that consumer preference is the primary driver of merchant payment acceptance. UPI's convenience and deep integration into daily life have made it the default payment method for millions. Proponents of a graded MDR suggest that merchants will continue to accept UPI because their customers demand it. A small, targeted fee on larger transactions is unlikely to reverse this powerful network effect, but it could create a more balanced and sustainable financial model for all stakeholders involved.