UPI’s Free Ride: A Masterstroke

UPI’s Free Ride: A Masterstroke - But Can It Last?

Already 2 years ago, I explored in my blog "The UPI Phenomenon: From Zero to 10 Billion" (https://bankloch.blogspot.com/2023/09/the-upi-phenomenon-from-zero-to-10.html) how India’s Unified Payments Interface (UPI) reshaped the digital payments landscape.

UPI has grown into one of the world’s largest digital payment systems, processing over 18 billion transactions monthly and accounting for more than 83% of India’s digital transaction volume. Its success is unprecedented, driven largely by a unique feature: zero cost. Merchants don’t pay to accept payments, and users don’t pay to send or receive money. This absence of fees has removed all barriers for users and merchants for joining the system. But this model requires also heavy subsidizing by the Indian government and as UPI further grows and expands internationally (UPI is already live in countries like the UAE, Singapore, Bhutan, Nepal, Sri Lanka, France and Mauritius), cracks are beginning to show. It raises the critical question: how long can "free" remain free?

While users and merchants benefit from a free digital payment system, banks and payment providers still carry the burden of maintaining backend infrastructure, handling fraud, and ensuring compliance and this without the direct revenue from UPI transactions. With no MDR (merchant discount rate) and zero user charges, the system generates no income, while transaction volumes rise and international expansion continues. The government’s subsidies should grow accordingly, but unfortunately the subsidy allocation for UPI in India has dropped sharply. Without a new cost-recovery model, continued expansion may not be financially feasible.

As RBI Governor Sanjay Malhotra has pointed out, "UPI is not truly free - someone is always paying.". He also highlighted that UPI’s financial sustainability may require the introduction of minimal transaction charges, particularly for high-value payments.

This means the current "free-lunch" is probably coming to an end, but it’s unclear who will carry the cost in the future, i.e. the users, the merchants or the banks. Many experts warn that charging users or merchants for UPI could backfire - possibly stifling the very innovation that has helped India leapfrog into a digital-first economy.

Despite this discussion, UPI should still be regarded as a calculated and brilliant investment from the Indian government. By subsidizing UPI, they unlocked a host of economic and societal benefits:

Rapid merchant adoption, especially in informal sectors.
Improved profitability of merchants through lower cash-handling costs, which is good for the economy.
Reduced cash usage, increasing safety and operational efficiency.
Greater transparency in financial flows, helping to track business activity, combat black money and steer economic decisions based on real-time data.
Enhanced financial inclusion, particularly in rural and low-income areas.
Global recognition, positioning India as a key player in the future of global payment infrastructure.

This is digital public infrastructure at its finest - simple, inclusive, and scalable.
The question on financial sustainability is also only coming thanks to the enormous success of UPI and due to its critical mass adoption can probably absorb a small fee structure.

All of this raises a broader, global question: why aren’t more governments worldwide doing this?

Could regions like the EU replicate UPI’s success? While many governments are betting on complex infrastructures or future-looking technologies like CBDCs, a simpler, more proven model already exists. Europe’s Wero initiative for example has bank backing, but limited government support. As a result, payment costs remain high - even for small businesses - and merchants still pay steep fees for both traditional and niche payment methods like vouchers.

The EU could, in theory, adopt a UPI-style, zero-cost system - but it would require adaptation. While the EU has strong regulation and advanced banking systems, it also faces fragmentation, complex data protection rules, cross-border complications, and high operating costs.

Still, the core lesson holds: public digital infrastructure can enable private-sector efficiency. With the right political will, even limited or targeted government support could help Europe leapfrog in payments innovation - just as India did.

UPI has proven that "free" can be a powerful accelerator. But it has also shown that nothing is truly free. As India now debates who should bear the cost, other countries must ask themselves: what’s the cost of not building something like UPI?

Public investment in payment infrastructure isn’t charity - it’s strategy. And the returns? Financial inclusion, transparency, security, and global leadership.

UPI has already transformed India. The next challenge is to sustain it and to inspire the rest of the world.

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