India central bank approves fees for UPI payment system

India’s central bank has passed a bill that will let the country’s instant payments system, UPI, charge merchants a fee for every transaction. The move ends the zero‑merchant‑discount‑rate rule that has kept transaction costs free for merchants since 2020. The new framework will let banks and payment apps set a small surcharge on UPI transfers, creating a revenue stream for the network and the banks that run it. The legislation was approved by Parliament on Tuesday and is expected to be rolled out by the end of the year.

The UPI platform, launched in 2016 by the Reserve Bank of India and the National Payments Corporation of India, has become the backbone of digital payments in the country. It processes more than 2.5 trillion transactions a year, with a volume of around ₹10 trillion (about $130 billion) in 2023. The zero‑rate policy was intended to spur adoption and make digital payments cheaper than cash, but the cost has fallen on banks, which have had to cover the loss. Many merchants and fintechs have complained that the policy makes it hard to recover the costs of running the infrastructure, while banks worry about the long‑term sustainability of the network.

Under the new rules, banks will be able to levy a merchant discount rate that can range from 0.25 % to 1.5 % of the transaction amount. The RBI has said it will set a cap on the maximum fee to keep costs low for consumers. The change is expected to generate roughly ₹30 billion a year for the banks and the payment network, according to RBI estimates. Critics warn that even a small surcharge could increase the cost of everyday purchases and slow the growth of UPI, especially in rural areas where cash still dominates.

The RBI will draft detailed guidelines within the next few months, and banks will need to update their systems to collect and remit the new fees. The government plans to monitor the impact closely and may adjust the fee caps if consumer prices rise. If the new model succeeds, it could allow UPI to expand its services, such as credit offerings and cross‑border payments, while keeping the system financially viable for all participants.