The budget will be presented on 1 February. In this budget, the biggest question has arisen before the government and the finance minister of the country. That question is about the shortcomings of UPI payment. To overcome this could be the biggest challenge in this budget. Even after record transactions, losses to payment aggregators have become a matter of biggest concern. Now the question is whether the government will be able to save the life of Digital India in this budget? Does the government have any such plan so that the digital revolution continues without any loss?
In fact, from a Rs 10 tea to a Rs 50,000 smartphone, or paying electricity bills or rent, plastic cards and paper currencies are gradually going out of use. Google Pay, PhonePe and other UPI-based platforms have become an integral part of everyday life, especially since demonetization and the pandemic, which has driven the country rapidly towards contactless transactions. But behind this success story lies a growing unease – one that industry leaders say policymakers can no longer ignore.
Despite rapid growth, UPI’s trader expansion is showing worrying signs of fatigue. According to data from an analyst, the growth rate of active merchant QR networks has been only about 5% CAGR in the last three years, despite not being widely spread across the country. Even today, only about 45 percent of merchants in India accept UPI payments on a monthly basis.
The geographic spread is even more striking: nearly a third of India’s pincodes have less than 100 Actis UPI traders, and nearly 70% have less than 500, while each pincode has an average of more than 2,500 merchants. This gap between possibility and reality shows the increasing pressure on the system. Let us also tell you what the experts have to say about this?
What is the solution to hidden costs?
Payments companies, banks and fintech firms have warned that the model supporting UPI’s growth is becoming increasingly unsustainable. The central government’s push for zero merchant discount rate (MDR) on UPI and RuPay debit card transactions, especially low-value person-to-merchant payments, has certainly increased financial inclusion, but the financial burden of the zero MDR policy is now becoming unbearable.
According to the Reserve Bank of India, it costs about Rs 2 to process each such transaction – a cost entirely borne by banks and fintech firms. A government release issued by PIB said that the expenditure incurred by the digital payments industry for providing services to customers/merchants is recovered through Merchant Discount Rate (MDR). Merchant Discount Rate (MDR) is the fee that merchants and other businesses pay to a payment processing company on debit or credit card transactions.
Incentives continuously reduced
India’s largest UPI platform PhonePe admitted that the mandatory zero MDR (Merchant Discount Rate) rule in its current form does not make economic sense. According to the company, to survive at scale, the ecosystem urgently needs a predictable cost recovery mechanism, be it through Merchant Discount Rate (MDR) or substantial government subsidies.
The fintech giant said the Rs 3,900 crore stimulus package distributed in FY 2023-24 was inadequate even to cover operational costs, and this support dropped to just Rs 1,500 crore in FY 2024-25. Speaking to ET, a PhonePe spokesperson said this allocation is far less than the amount required to build the technical infrastructure, connect consumers and merchants, pursue education initiatives and implement robust risk and fraud prevention systems for UPI.
RBI Governor had given indications
The Reserve Bank of India has also reiterated these concerns. RBI Governor Sanjay Malhotra has emphasized that while UPI may have provided immense public interest, its long-term viability depends on whether one pays for its underlying expenses.
Malhotra had said that I never said that UPI can remain free forever. I had said that there are some expenses associated with UPI transactions, and someone has to pay them. Who pays is important, but not as important as who pays the bill. Therefore, it is important for the sustainability of the model that someone pays, collectively or individually.
Earlier this year, speaking at a financial sector summit, the central bank chief said UPI is a critical infrastructure that the government has deliberately chosen to subsidize and keep free for users – a policy that has paid off in terms of usage and will continue to do so.
No long term revenue model
Meanwhile, the Payments Council of India (PCI), representing non-bank payment system participants, has also expressed concern that while government incentives were important in promoting early usage, the current framework does not provide any viable long-term revenue model for companies building, maintaining and securing payments infrastructure.
How will investment be possible?
The leading body said that PCI emphasizes that maintaining long-term investments in payment processing, customer acquisition and operational management remains a matter of serious concern. The current incentive structure is not a sustainable revenue model, putting the survival of many fintech companies at serious risk without adequate support.
For the current financial year, the government has allocated only Rs 427 crore for digital payments promotion, PhonePe said in an ET report. On the contrary, it is estimated that this ecosystem will collectively invest around Rs 8,000-10,000 crore in the next two years.
Depending on the growth trajectory and considering FY 2023-24 subsidies as the benchmark, the actual cost of maintaining zero MDR through government subsidies will be between Rs 8,000-10,000 crore over the next two years, and this figure will increase further with the expansion of UPI. This exposes a serious instability. The fintech firm further said in the media report that it is not practically possible for the government to bear this cost through the annual budget allocation.
Reduction in government incentives
This financial gap has increased rapidly despite the huge increase in the use of UPI. NPCI data showed that in October alone, UPI processed transactions worth Rs 27.28 lakh crore across 20.7 billion payments, with an average daily load of about 668 million transactions worth about Rs 88,000 crore.
Due to increasing penetration in secondary and tertiary cities and strong demand during festive seasons, UPI now accounts for about 85 percent of total digital payments in the country. Despite this, budgetary support has changed in the opposite direction. The amount of government incentives for digital payments has fluctuated wildly in recent years – rising from Rs 1,500 crore in FY2022 to Rs 3,500 crore in FY2024, then falling to Rs 2,000 crore in FY2025 and falling to Rs 427 crore in this year’s budget estimates.
what is needed
PhonePe has warned that without a sufficient funding increase, the growth momentum of the industry is at risk. The platform pointed out that UPI reaches less than half of India’s smartphone users, and expanding to tier-4 cities and beyond will require massive sustained investment in both merchant acceptance infrastructure and consumer education.
Without adequate funding, both consumer acquisition and merchant onboarding in tier-4 cities and beyond will be significantly impacted, the company said in an ET report. In such a situation, the pressure on payment service providers is increasing. The rising costs of infrastructure development, customer acquisition, cyber security, regulatory compliance and providing services in rural areas are colliding with the near-zero revenue model.
The company said that MDR does not mean that consumers will pay. But without a sustainable revenue model, the ecosystem’s ability to invest in marketing, education, risk and fraud prevention, and develop solutions for the next billion users is being compromised. With no solid income source to offset these expenses, many companies may begin to rethink their expansion plans and slow down the pace of innovation.
Budget 2026: The deciding factor?
PhonePe and other industry leaders believe that the only way to break the current cycle is to implement a controlled MDR (Multi-Digital Reduction Model) framework, allowing the ecosystem to become self-reliant and the government to direct public funds towards strategic priorities like infrastructure development and digital literacy. The company said that a sustainable, market-based monetization model will make the ecosystem self-reliant.
Reiterating the fintech sector giant’s point, Vishwas Patel, joint MD of Infibeam Avenues and chairman of PCI, said in an ET report that due to zero MDR (medical return rate) on UPI and only Rs 1,500 crore allocated earlier for such a large-scale transaction process, the system is deprived of the funds needed for sustainable growth.
What was the demand from companies?
According to an earlier IET report, industry leaders were preparing to put pressure on the central government for a substantial increase in subsidies during the deliberations on the Union Budget 2026. The report further states that payment operators have sought permission to impose a controlled MDR (intermediate retail price rate) of 25-30 basis points on payments made to large merchants (those with an annual turnover of more than Rs 10 crore). Their argument is that businesses with large turnover can afford this nominal fee, which will keep the financial system running smoothly.
Furthermore, PCI warned that in the absence of reforms, fintech companies may soon be forced to curtail their operations, halt rural expansion and limit innovation, harming the government’s own objectives of deepening financial inclusion and expanding UPI reach to the next 30 million Indians.
The MDR policy of digital payments is putting pressure on payment companies and banks.