Fair pricing could help sustain UPI network

UPI's scale has made the issue of financial responsibility more crucial. Its success depends on a straightforward arrangement: customers pay without any noticeable expense, merchants facilitate transactions without card machines or merchant discount rates (MDR), and banks and payment companies bear most of the cost, partially offset by public subsidies.

However, this model is under scrutiny. The Parliamentary Standing Committee on Finance recently presented a report estimating roughly Rs 20,700 crore in annual operating costs, far exceeding the Rs 2,000 crore allocated under the zero-MDR framework. The Department of Financial Services is currently evaluating two alternatives: reinstating MDR for specific high-transaction merchants and phasing out government support via a tiered incentive system.

India needs to determine how to distribute the network's expenses based on capacity to pay. It must also decide how to responsibly utilize aggregated, privacy-protected payment data for public purposes, all under clear standards. The initial impetus for UPI's adoption was the establishment of structured merchant ecosystems, which research suggests correlates with increased UPI usage.

After establishing fundamental connectivity, the development of business ecosystems becomes even more critical. This insight should inform the design of any MDR. A minor percentage point increment might be tolerable for a supermarket chain but could be significant for a street vendor. The impact may go unnoticed in regions where UPI acceptance is already widespread, but could hinder merchant onboarding in areas where the network is still in its infancy.

A uniform rate would overlook both merchant and geographic disparities. A viable approach would be to maintain UPI's free access for customers and small merchants, while permitting a capped MDR for larger commercial users and higher-value transactions. Support should persist in regions where acceptance networks are still emerging.

Thresholds should be determined based on merchant margins, administrative practicality, and potential influence on local adoption. MDR does not have to be the sole revenue source. Companies can create commercial services around UPI while ensuring the underlying payment remains free. Payment data also holds public value. At UPI's scale, anonymized and aggregated transaction signals can reveal where spending is expanding, adoption remains limited, and formalization is gaining traction.

PhonePe's PulsePro serves as an example of how commercial payment intelligence can aid public planning. A recent Memorandum of Understanding (MoU) with the Ministry of Electronics and Information Technology (MeitY) plans to integrate its metrics into Prime Minister GatiShakti for infrastructure planning, economic analysis, and urban and rural development.

Payment intelligence can pinpoint areas where connectivity has surpassed merchant development, digital commerce has outpaced formalization, and infrastructure hasn't translated into women's participation in digital spaces. This is just the beginning, but policymakers require a comprehensive ecosystem perspective. UPI data, combined with official statistics, can offer a more detailed understanding of local commerce, including informal activities.

India created UPI by merging public infrastructure with private innovation. The same principle should guide its data policies: private firms can develop services, while public institutions establish standards for privacy, access, and public usage. Implementing fair pricing can help sustain the network; responsible data use can enhance our understanding of local economies.