Q. The phenomenal growth of UPI has created a paradox: Rapid expansion in transaction volumes alongside challenges in ensuring the long-term...
Question
Q. The phenomenal growth of UPI has created a paradox: Rapid expansion in transaction volumes alongside challenges in ensuring the long-term sustainability of small-value digital payments. Examine. (10 marks 150 Words)
Model Answer
Q. The phenomenal growth of UPI has created a paradox: Rapid expansion in transaction volumes alongside challenges in ensuring the long-term sustainability of small-value digital payments. Examine. (10 marks 150 Words)
Paper
GS III
Subject
Economic Development
Syllabus as Per Notification
Indian Economy and issues relating to planning, mobilisation of resources, growth, development and employment
Topic
Digital Economy: UPI, Digital Payments.
Approach:
Introduction
Introduce with the growth of UPI Transactions in both Volume as well as Value.
Body
UPI's phenomenal growth: From payment instrument to digital public infrastructure
Unprecedented scale and global recognition, Retailisation of digital payments.
The paradox: High transaction volumes, but limited transaction-linked revenue
Zero-MDR model creates a revenue-cost mismatch, Limited fiscal support, Financing the next phase of expansion.
Why small-value payments intensify the sustainability challenge?
High-frequency, low-value economics, Scale-driven fraud and infrastructure burden, Pressure on innovation and competition.
Why blanket monetisation could undermine UPI success
Disproportionate burden on small merchants, Risk of cash reversion and consumer pass-through, Erosion of network effects and public-good value.
Way Forward
Adopting differentiated, threshold-based pricing, Targeted Government Support, Building alternative revenues & Cost efficiency
Conclusion
Conclude by emphasising the need to balance affordability with sustainability through apublic-good core with sustainable commercial layers.
Context
Lok Sabha passes bill to authorise govt to permit banks to levy charges on UPI transactions
Introduction
UPI transformed Indian payment architecture by combining interoperability, affordability and scale. From just 2 crore transactions in FY2016–17, UPI processed 24,162 crore transactions worth ₹314 lakh crore in FY2025–26, accounting for nearly 49% of global real-time payment volume. Yet, its success presents a volume–value–viability paradox: the small-value transactions driving mass adoption generate limited transaction-linked revenue while requiring continuous investment in infrastructure, cybersecurity and resilience.
Body
UPI's phenomenal growth: From payment instrument to digital public infrastructure
Unprecedented scale and global recognition
UPI transaction volume has increased nearly 12,000-fold and transaction value over 4,000-fold since FY2016–17.
UPI processes around 66 crore transactions daily, accounting for 85% of India’s digital payments and nearly 49% of global real-time payment volume, with IMF recognising it as the world’s largest real-time payment system.
Retailisation of digital payments
Person-to-Merchant (P2M) transactions constitute 63% of UPI volume, with 86% of P2M transactions below ₹500.
This shows that UPI growth is deeply rooted in everyday, small-ticket transactions, making it a critical instrument of financial inclusion and digital formalisation.
The paradox: High transaction volumes, but limited transaction-linked revenue
Zero-MDR model creates a revenue-cost mismatch
Since January 2020, UPI has operated under zero Merchant Discount Rate (MDR), limiting transaction-based revenue for banks and Payment Service Providers (PSPs).
Yet, every transaction incurs processing and security costs, with annual UPI infrastructure costs estimated at ₹10,000–15,000 crore.
Limited fiscal support
Government incentives remain limited, ₹2,196 crore in FY2026 and ₹2,000 crore budgeted for FY2027, covering only around 11% of actual industry costs.
Financing the next phase of expansion
UPI continued expansion into rural and semi-urban areas requires sustained investment and a self-sustaining revenue model, as relying on Government subsidies alone is not viable for the next wave of growth.
Why small-value payments intensify the sustainability challenge?
High-frequency, low-value economics
With 86% of P2M transactions below ₹500, UPI relies on low-ticket payments with limited revenue potential, despite requiring secure authentication, processing and settlement.
Scale-driven fraud and infrastructure burden
At around 66 crore transactions daily, even marginal increases in infrastructure, cybersecurity and compliance costs create substantial aggregate expenditure.
Annual fraud losses exceeding ₹1,000 crore further underscore the cost of maintaining a secure high-volume payment ecosystem.
Pressure on innovation and competition
Banks, fintechs and PSPs require commercially viable models to sustain technological investment.
The concentration of around 83% of UPI transaction volume with PhonePe and Google Pay highlights the need for sustainable economics that enable smaller players to compete.
Why blanket monetisation could undermine UPI success
Disproportionate burden on small merchants
A universal MDR could increase the cost of accepting digital payments for micro and small merchants.
Union Government clarified that UPI will remain free for users and the vast majority of merchants, with any future MDR intended to be nominal and threshold-based.
Risk of cash reversion and consumer pass-through
Charges on low-value transactions could push price-sensitive merchants toward cash or cost pass-through, weakening UPI’s affordability and digital adoption.
Erosion of network effects and public-good value
Blanket monetisation could weaken UPI network effects, undermining its wider benefits for financial inclusion, digital formalisation and everyday commerce as Digital Public Infrastructure.
Way Forward
Adopting differentiated, threshold-based pricing
Keeping P2P and small-ticket P2M transactions free, while permitting nominal MDR on selected higher-value merchant transactions.
Recent Payment and Settlement Systems (PSS) Act amendment provides an enabling framework, with institutional oversight through the UPI and Services Steering Committee under NPCI.
Targeted Government Support
Direct government support towards small merchants, rural inclusion, cybersecurity and system resilience, rather than indefinitely subsidising every transaction.
Building alternative revenues & Cost efficiency
Banks, fintechs and PSPs can diversify through merchant analytics and value-added services, while AI-based fraud detection, automated risk monitoring and scalable infrastructure can reduce the long-term cost of processing UPI transactions.
Conclusion
UPI paradox is not a contradiction between growth and success, but a challenge of managing success. Small-value transactions generate limited direct revenue yet drive financial inclusion, everyday commerce and digital formalisation. India must therefore balance affordability with sustainability through a “public-good core with sustainable commercial layers”, combiningdifferentiated pricing, targeted support, alternative revenues and technological efficiency.