Can banks charge for UPI payments now? Government gains power to permit fees

India's government is gaining the power to levy charges on the popular Unified Payments Interface (UPI) and other digital payment systems, following the Lok Sabha's passage of a bill amending the Payment and Settlement Systems Act, 2007. While the bill does not immediately introduce fees, it removes a long-standing restriction that prevented banks and payment service providers from charging a Merchant Discount Rate (MDR) on UPI transactions.

UPI, launched in 2016, has become India's dominant digital payment method, facilitating instant money transfers via mobile phones. It has remained free for consumers since its inception, with the absence of MDR charges specifically implemented to encourage digital adoption and reduce cash dependency. The government and industry bodies are emphasizing that this change does not signal an immediate shift to paid transactions for users.

The Payments Council of India (PCI) has stated that UPI will continue to be free for consumers. Any potential charges introduced would likely be part of commercial agreements between merchants and payment service providers, rather than direct consumer fees. Small merchants and kirana stores are expected to remain protected, as UPI was designed to be accessible and affordable for businesses of all sizes.

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UPI has always been free for consumers since its launch in 2016. Every Indian can continue making instant digital payments without paying any transaction charges

The rationale behind considering future charges stems from the immense scale of UPI, which operates as the world's largest real-time payment system, handling billions of transactions monthly. Maintaining such a vast digital network requires significant ongoing investment in technology, cybersecurity, fraud prevention, and customer support. Currently, these costs are borne by banks, fintech companies, the National Payments Corporation of India (NPCI), and the Reserve Bank of India (RBI).

Payment companies argue that allowing MDR could provide them with the necessary capital to further invest in enhancing the UPI system's infrastructure and security. The amendment, therefore, opens the door for future revenue streams to sustain and improve the digital payment ecosystem, while assurances are being made to protect the end-user experience.

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any merchant service charges, if introduced, would be commercial arrangements between merchants and payment service providers and would not directly translate into consumer charges.