Banking Central | What does UPI surge mean for Indian payments system?

UPI crossed a new milestone in August

The Unified Payments Interface (UPI), the country’s most popular payments platform, crossed yet another milestone by clocking 20 billion transactions, worth nearly Rs 25 lakh crore, in August.

That is an astonishing number by any measure. A home-grown payments system, barely a decade old, now moves more money each month than India’s entire GDP for the period.

UPI has become so deeply woven into daily life that one barely notices it. The shopkeeper’s QR code, the fruit vendor’s phone beep, the cab driver’s quick scan— it’s everywhere. In volume terms, UPI commands 85 percent of India’s retail digital payments.

Yet, there are challenges too.  The zero- merchant discount rate (MDR) policy — once hailed as a masterstroke to boost adoption —is beginning to look like a double-edged sword.

Banks and fintechs that run the pipes of this ecosystem are now finding it hard to justify investments without a revenue stream.

The government’s subsidy support for UPI has shrunk from around Rs 4,500 crore in FY24 to just Rs 1,500 crore in FY25. That gap has forced some banks to start charging payment aggregators for UPI transactions.

The Reserve Bank of India, too, has signalled unease with the current model, backing the industry’s demand for a rational MDR on merchant payments. Without it, UPI’s growth story could begin to lose steam.

Daily transactions have crossed 700 million at times, and the year-on-year growth is still in double digits. Two years ago, the daily average stood at around 350 million. The government’s ambitious target of one billion transactions a day no longer sounds far-fetched.

That said, the quality of this growth deserves attention. UPI’s usage is shifting rapidly from person-to-person transfers to merchant payments. Nearly two-thirds of all transactions now come from merchant activity.

That’s a reversal from earlier years and a healthy sign for digital commerce but also a reminder that merchants cannot be expected to absorb costs indefinitely.

While UPI’s success is beyond dispute one must remember that scale alone doesn’t make a system sustainable.  Viability is a critical factor.