You scan a QR code and pay ₹20 for tea. The shopkeeper gets the money in a matter of seconds. You do not pay any transaction fee and the merchant rarely does either. It feels like the money is transferred at no cost to produce. It is not.
There are accounts to be kept and messages to be sent. There are apps to be maintained and fraud to be guarded against. There are switches to be flipped at the National Payments Corporation of India. Someone has to get up when the ₹20 turns out to not be there or show up when it does. UPI took the price off the visible menu. It did not take it off the production floor.
The Largest Numbers Are Made Up Of The Smallest Payments
UPI’s scale is almost unfathomable. In May 2026, it processed 23.2 billion payments valued at nearly ₹29.9 lakh crore. It connected more than 700 banks (NPCI). Most of those payments were miniscule. A cup of tea here, a auto fare there. A vegetable or two, or a message to a friend. That is the point.
UPI payments are quick and cheap enough to act as a viable substitute to cash even when the quantity is too small to justify a POS machine or some other form of electronic money transfer. They grew by being available to people and businesses at the margins. That raises a natural question. How do the organizations processing tens of billions of payments make money off of them?
Zero MDR Implies Zero Merchant Revenue Streams
Merchants rarely paid any Merchant Discount Rate (MDR) for UPI payments since January 2020. MDR is the fee a merchant has to pay for accepting payments through certain electronic modes. For UPI, it was capped at zero percent under the government policy (Reserve Bank of India). That spurred adoption.
A street vendor does not have to give up 1% of whatever she earns. A shopkeeper can put a QR code out without thinking about whether her customers would be willing to bear the extra cost. The customers do not have to think about whether paying by cash or card is more convenient for them. The economic bargain is as simple for the person sending the money as for the person receiving it. A zero MDR, and zero transaction fee for the customer implies that there is not much revenue to be had for processing individual payments. Volume will help, obviously. But multiplying zero by 23 billion still gives you zero.
The Government Has Been Investing In The Incentives For The Small Payments
The government has supplemented the ecosystem with targeted incentives for small-value transactions. A ₹1,500 crore scheme was announced by the Union Cabinet for the 2024-25 fiscal year for incentivizing UPI payments of up to ₹2,000 to eligible small merchants. The incentive would be given at the rate of 0.15% of the value of the transaction processed throughUPI (Press Information Bureau).
The payment itself was free for the merchant. The economic support was routed through the public exchequer. That does not imply that the Union government is subsidizing every UPI transaction. At most, it suggests that there were specific commercial propositions being made by the state to influence the choices of consumers and businesses. The goal was to create an ecosystem where small-value digital transactions were preferable to cash from both sides of the transaction.
India has decided to treat cheap, accessible payments infrastructure as partly a public good. The system has social value beyond whatever transaction fees it extracts or incentives it captures. The entire system lowers the costs for doing business in the Indian economy. It reduces the risks associated with holding cash and expands the ability of the financial system to serve the economy. It creates a digital trail for every cash transaction that can be used to improve credit access or tax compliance.
The government has agreed to bear some of the cost for that. To put it more bluntly, the society captures some value by having every street vendor as the part of a formal economy even if it does not directly offset the costs to the taxpayers.
Payment Apps Make Money By Selling To The Customer
A payment app rarely has to make money out of thin air. It has an option to use UPI to capture customers and then sell them other services. Insurance, credit, and investments for the individuals and businesses. Marketing, advertising, and analytics for the merchants. The list goes on. The free transaction is the cost of getting the customer to the seller. UPI transactions can be analogs to other digital services with similar business models.
The problem is competition. A customer will not always buy the insurance or the credit or the analytics. They might simply open the app, pay ₹100 and close the app again. The company has used UPI to make a payment for the customer but only at the cost of losing money on the transaction. The company wants to make the UPI transaction so frequent and regular that it becomes a habit and an essential part of the customer’s interactions with the financial system. Only then will they be able to extract value by selling the customer other services. The bank is the customer of the payment app.
Banks Bear A Unique Cost
UPI apps might see all the customers but the banks bear all the responsibility. The customer bank has to authorize and record every payment while the merchant bank has to receive it. They operate at the lowest level of the payments ecosystem, which has to constantly balance its books while dealing with UPI’s demands for more volume at the lowest possible cost. The Reserve Bank of India put the dilemma out in the public domain with exceptional honesty.
“The challenge is to ensure that payment service charges are low enough to promote digital payments, while ensuring that the cost of payment systems is not unduly high to the ecosystem participants, resulting in disinvestment in the system.” It described the ideal situation as “a high-volume, low-value and low-cost payments eco-system that simultaneously sustains the confidence and investment from the payment ecosystem participants.” (Reserve Bank of India)
That is a problem for the people deciding how much a bank can charge for a particular payment. UPI makes it cheaper to move money than before. But a cheaper system needs to make money by being indispensable to the larger economy.
A Free Ride Captures Valuable Information About The Economy
A UPI payment captures information. It identifies a merchant, a customer, a volume, and a frequency. With the right consent and privacy safeguards, it can serve as a reliable source of information for helping financial institutions build credibility with businesses.
A street vendor with no previous banking history has created a permanent digital trail of her transactions by accepting UPI payments. That alone can help lenders and investors identify her as a credit-worthy partner. The potential value of this data is immense for the formal financial system.
It is not directly captured by the entities facilitating these payments. Once again, the system acts as an enabler for other services, increasing the overall value of the financial infrastructure. That is why UPI’s economic value extends far beyond the mere act of transferring money from one person to another. The network effect has turned every payment into a potential opportunity to expand the reach and depth of India’s financial markets.
Someone Always Pays For The Road
UPI is frequently likened to a road. The customer rarely pays for using it, but the road nevertheless needs to be constructed and maintained. The analogy fails because UPI is not a public good. It is a complex payments ecosystem, which includes elements of the public infrastructure and private enterprise.
As such, the question of funding is far more intricate than simply adding a toll on every transaction. The options range from adjusting the MDR to supplementing the system with direct government support, expanding the role of cross-selling by payment apps, and making the banks cover UPI’s expenses. Each has its strengths and weaknesses. Higher MDR inflicts pain on the ecosystem, while direct government support puts long-term fiscal sustainability in peril.
Cross-selling has fantastic profits but is far too reliant on customer choices to be a consistent source of revenue, while higher bank expenses could lead to reduced investment and innovation capacity. UPI addressed the central problem of promoting digital payments. It has to grapple with a related dilemma, ensuring that its access to free payments turns it into a sustainable enterprise. The QR code makes the payment look simple. The bills are due for the entire network behind it.