Big to get bigger: India's UPI fee shift to entrench dominant incumbents

While regulations prohibit merchants from explicitly passing on the cost, industry executives expect some degree of indirect pass-through. But the Indian central bank, analysts at Bernstein, industry executives and half a dozen retail merchants Reuters spoke to in Mumbai said that a shift back towards cash is unlikely. Govind Rawal, manager at a large clothing retailer named Suvidha in Mumbai's Dadar area, said about 80% of his shop's daily revenue of about 2 million rupees ($21,000) flows via UPI and he does not intend to pass on the cost. "Customers are too used to UPI and the cost is quite small, so it doesn't make too much difference," he said. In another Mumbai locality, 31-year-old Mahendra Vishnoi, who was shopping for household items, said he mostly uses UPI for everyday payments and hopes merchants do not raise prices to offset the fees, even though a small increase would not necessarily send him back to cash. "The fees shouldn't keep rising in the future though. If it stays where it is for a few years, it should be fine." UPI, used by over 500 million people in India to pay for everything from roadside cups of tea to iPhones, will cease to be free from October 15 after regulators last week permitted a 0.4% fee to be charged to merchants on transactions exceeding 2,000 rupees ($21). The new fee, called the merchant discount rate (MDR), is expected to generate annual revenue of up to $1.1 billion for payment apps by March 2028, according to estimates by brokerage Bernstein. That would mean PhonePe and Google Pay would get about $900 million of that sum, based on their market share. "The introduction of MDR is a positive step towards offsetting substantial operational costs and liabilities," said Rahul Chari, co-founder at PhonePe. The change marks a shift for an ecosystem built around free payments, whose rapid adoption was driven by factors including India's 2016 demonetisation, which withdrew a large chunk of high-denomination currency from circulation, the COVID-19 pandemic and heavy customer incentives. It also brings UPI closer to the models of global retail payment systems such as China's Alipay, Singapore's PayNow and Pix in Brazil, where fees range from 0.6% to 1.5%. But the UPI fee has also drawn political criticism and prompted concerns that merchants could pass the cost on to consumers, potentially encouraging a shift back to cash in Asia's third-largest economy. Walmart-backed PhonePe and Google Pay could earn hundreds of millions of dollars a year in extra revenue from India's move to allow merchant fees on its widely used Unified Payments Interface (UPI) digital payment network, entrenching the dominant apps' lead over smaller rivals. The end of UPI's six-year reign as a free network will give PhonePe and Google Pay, which together accounted for 80% of UPI payment values last month, the firepower to expand to rural areas, while prompting rivals to chase higher-value transactions to draw users and fees. But the boost for the dominant incumbents could also renew focus on the level of market concentration regulators may be comfortable with. The new revenue pool could give PhonePe and Google Pay greater incentive to expand beyond large urban centres into rural India, an expansion that was previously less commercially viable, according to two industry sources familiar with internal discussions at the firms. Payments outside large urban areas may be smaller, but transaction data can help companies offer tailored loans and other financial products to bring in revenue, one of the sources said. Google Pay did not respond to an email seeking comment, while PhonePe did not share specifics about its plans. The sources spoke on the condition of anonymity as they are not authorised to speak to the media. Greater firepower for the two players, though, could also revive questions over whether regulators will try again to check their dominance in UPI payments. The National Payments Corporation of India, a quasi-regulator and operator of UPI, has twice deferred a decision on imposing a 30% market-share cap. Smaller rivals, meanwhile, are likely to target higher-value transactions such as ticket bookings, business payments and utility bills, while expanding credit offerings on UPI, executives and analysts said. "Now I can give a direct reason to my team why we should continue to invest and grow the UPI ecosystem," said Bipin Preet Singh, co-founder of MobiKwik, which ranks 15th on the tally of most frequently used apps for UPI payments. He expects the fee to push players towards bill payments and online commerce, as the industry shifts toward person-to-merchant payments over promoting peer-to-peer transfers. Some venture investors, though, caution that the reform arrives late and may be skewed towards larger players. "It might on the margins help smaller players with existing distribution, but the largest benefits are likely to accrue to large firms like PhonePe or Google Pay," said Joseph Sebastian, vice president for investments at Blume Ventures.

Big to get bigger: India's UPI fee shift to entrench dominant incumbents

Merchants expect to absorb the cost

New merchant fee to take effect October 15

Fee change could boost dominant payment apps

Rural expansion and competition implications

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