The Unified Payments Interface has spent its first decade making digital payments almost invisible — a scan, a tap and the money moves. In the second decade, India’s most ubiquitous digital payments system faces a problem its success created: how to keep UPI growing at breakneck speed without making its economics unsustainable.

The zero-MDR regime that helped turn UPI into a mass-market phenomenon is under scrutiny as policymakers weigh whether selected merchant transactions should carry a charge, while keeping UPI free for person-to-person (P2P) transactions.

The scale of UPI’s rise is difficult to overstate. Annual transactions have surged from just 1.78 crore in FY17, its first year, to more than 24,162 crore in FY26 — an almost 13,000-fold jump. Transaction value has climbed from ₹0.07 lakh crore to ₹314 lakh crore, a more than 4,000-fold increase. From 21 banks at launch in April 2016, the network had 741 banks live by July this year.

UPI now processes an average of 66 crore transactions a day and accounted for 84 per cent of India’s digital payment transactions in FY26.

Globally, its heft is growing too. UPI accounted for 49 per cent of real-time digital payment volumes worldwide in 2025. But beneath those staggering numbers lies an Indian characteristic: much of UPI is about very small payments.

Person-to-merchant transactions account for 63 per cent of volumes, and 86 per cent of these transactions are below ₹500. Even among person-to-person payments, 59 per cent are below ₹500.

That makes the debate over merchant discount rates, or MDR — a fee that the merchant pays to banks and payment service providers for processing digital payments — especially delicate.

Framework design critical

The government has passed legislation that opens the door to allow merchant charges on selected UPI transactions. Two models are reportedly under consideration: an MDR of 0.25-0.5 per cent on merchant payments above ₹2,000, or charges limited to merchants with annual turnover exceeding ₹1.5 crore.

Small-value transactions and P2P payments are expected to remain outside the charging framework. The argument for a limited MDR is straightforward: UPI may be free to consumers, but the infrastructure behind those payments is not.

“A substantial portion of UPI’s growth has been achieved under a zero MDR framework, which has played a pivotal role in driving merchant acceptance and consumer adoption,” said Dharmender Jhamb, partner and fintech industry leader at Grant Thornton Bharat.

A poorly designed MDR, he warned, could raise acceptance costs, particularly for price-sensitive merchants, and encourage some businesses to pass on the cost or steer customers towards cash.

“A stronger enforcement framework is needed to prevent merchants from passing MDR costs to customers or promoting cash payments through discounts,” he said.

But some feel that a targeted charge may be less disruptive.

Kumar Abhishek, founder and CEO of Qualcomm-backed payment solution company ToneTag, said large merchants already pay more than 1 per cent for card processing. An MDR of 25-30 basis points on UPI could, therefore, remain economically attractive while creating a predictable revenue stream to fund infrastructure, security and innovation.

“UPI is deeply embedded in the daily lives of consumers because it is simple, fast and convenient. A small processing fee at the merchant level will not change consumer payment habits,” said Abhishek

“If low-value payments remain outside the charging framework, routine transactions such as a ₹50 tea, a ₹300 grocery purchase or a ₹1,000 payment to a neighbour should continue as they do today. The impact could be more visible on transaction value because larger merchants typically account for higher-value payments, and they may reassess the economics of UPI compared with cards, net banking or other payment options. Some large merchants may also negotiate with payment providers or encourage customers towards payment methods that are more economical for them. However, I would not expect MDR by itself to significantly change UPI adoption,” said Abhay Johorey, managing director of global business consulting firm Protiviti.

US pressure

The economics of UPI are also acquiring a geopolitical dimension.

A US Trade Representative’s report has criticised aspects of India’s digital-payment framework, including policies supporting UPI and RuPay. It has argued that zero transaction charges and government support for domestic networks have strengthened Indian payment systems while hurting the potential business of US card companies such as Visa and Mastercard.

The US has also objected to NPCI’s proposed 30 per cent cap on the transaction volume of individual third-party payment apps. The move is aimed at reducing concentration and systemic risk, with Google Pay and Walmart-owned PhonePe together accounting for more than four-fifths of UPI transactions. Implementation of the cap has been deferred until December 2026.

GTRI’s Ajay Srivastava said India should not introduce MDR merely to respond to US trade complaints or protect foreign payment companies. The focus, he said, should be the cost of running UPI and ensuring its long-term sustainability.

Government’s position

The finance ministry, in a statement, has said that as and when MDR charges are introduced, they will apply only to a limited set of merchant transactions, above a certain threshold, at a nominal rate, far lower than debit or credit card MDRs.

“The vast majority of the transactions will remain free of charge for merchants on UPI. MDR, if introduced, will only be threshold-based and not blanketly levied to all,” the ministry said.

A “UPI and Services Steering Committee” headed by NPCI is expected to decide on the MDR, if any, the ministry said.

Next decade’s focus

The next decade of UPI, industry executives say, cannot simply be about processing more transactions. It will have to make payments smarter, safer and more useful.

Artificial intelligence and voice-based payments could make UPI accessible to new users, while AI-enabled fraud prevention, dispute resolution and conversational payments could improve the experience for existing ones.

Johorey sees UPI moving from simply ‘paying now’ towards programmable and delegated payments. Recurring bills, subscriptions and other transactions could operate within customer-defined limits and permissions.

The merchant QR code could also become more than a payment collection tool. It could support invoicing, reconciliation, accounting, inventory, loyalty programmes, supplier payments and working-capital finance — effectively turning UPI into a digital operating layer for small businesses.

AI agents could eventually initiate routine transactions, but only within tightly defined boundaries, including explicit consent, transaction limits, merchant restrictions and audit trails.

Cross-border payments offer another large opportunity.

UPI is already operational in 11 countries, including the UAE, France, Singapore, Sri Lanka, Nepal, Mauritius, Qatar, Cambodia, Greece and the Maldives. The larger prize is to connect India’s instant-payment system with similar networks abroad, making retail payments and remittances as seamless across borders as they are within India.

If the first 10 years were about making digital payments universal, the next 10 could be about making the system financially sustainable — without breaking the simplicity and low-cost access that made UPI indispensable in the first place.