UPI growth slows as India debates the price of keeping digital payments free

India’s Unified Payments Interface has spent the better part of a decade turning the humble QR code into one of the world’s most powerful symbols of digital adoption. But the latest numbers suggest that the next phase of UPI’s growth may be considerably less explosive.

UPI transactions grew 23.5% year-on-year to 92 billion in the first four months of FY27, up from 74.5 billion during the corresponding period last year. That sounds impressive, and it is. But the catch is that growth has slowed sharply. During the April-July period of FY26, UPI transaction volumes had grown 33.5%.

The 10-percentage-point decline comes as the government and the payments industry debate whether to bring back the Merchant Discount Rate, or MDR, on certain UPI transactions.

Of size, scale, and slowdowns

The slowdown is not entirely surprising. UPI has reached a scale where maintaining the growth rates of its early years was always going to become difficult. Transaction volumes grew by around 30% in FY26, compared with 41% in FY25. Two years ago, growth was even faster.

There is also a significant base effect at work. When a platform is processing tens of billions of transactions every month, adding another 10 billion transactions requires considerably more users and activity than it did a few years ago.

Yet industry executives believe the story goes beyond mathematics. For years, fintech companies and payment providers used cashback, incentives and aggressive merchant acquisition to drive UPI adoption. With UPI generating little or no direct revenue for most participants, those incentives have increasingly disappeared as companies focus on profitability. Industry voices argue that a sustainable MDR could give banks, payment companies and fintechs greater room to invest in customer acquisition, merchant expansion and the infrastructure required to take UPI into newer markets.

That is the economic argument for MDR.

No free lunches

The counterargument is that UPI is more than a commercial payments product. It is digital public infrastructure, much like Aadhaar, and keeping it free has helped make digital payments accessible to millions of Indians. UPI penetration is still estimated at around 40%, suggesting that there is considerable headroom left, particularly outside India’s largest cities. Brazil’s Pix, for example, has achieved much higher penetration despite operating with a different economic model.

The government appears to be attempting a middle path. The Lok Sabha has passed legislation that creates a framework for potentially introducing MDR, while proposals under consideration have focused on large merchants and higher-value transactions rather than everyday small-ticket payments. Moneycontrol has reported that the government could consider an MDR of around 0.25%-0.30% for high-value transactions involving large merchants.

Finance Minister Nirmala Sitharaman has stressed that MDR is a charge on merchants, not on customers. Technically, that distinction is correct. A consumer is not being presented with a separate UPI transaction fee at the checkout.

But economics has a habit of making neat distinctions rather messy.

It would be naive to assume that sellers will simply absorb every additional cost imposed on their businesses. A merchant facing a new processing expense has several choices: accept lower margins, reduce discounts, raise prices, or find another way to recover the cost. In competitive markets, some of that burden will inevitably travel down the chain to the buyer.

That is simply the nature of the beast called capitalism.

Striking a fine balance

The bigger question, therefore, is not whether UPI should have an MDR. It is whether the fee is designed intelligently enough to preserve UPI’s greatest achievement: making digital payments almost invisible to the consumer.

UPI’s growth may be slowing, but it is hardly slowing down. The system still processes more than 23 billion transactions a month, accounting for roughly 88% of India’s digital transactions.

The challenge now is to ensure that making UPI commercially sustainable does not make using it commercially painful.