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Hello, this is Priyanka Salve, writing to you from Mumbai. Welcome to the latest edition of "Inside India" — your one-stop destination for stories and developments from the world's fastest-growing large economy. The world's largest payments system by volumes, India's unified payment interface, popularized cashless transactions in the country by offering free services for all. That's about to change. Starting next month, merchants will need to pay a fee of 0.4% for accepting payments higher than $20. While the government has defended the move, confident it will not hurt India's march towards a cashless economy, critics disagree. Any thoughts on today's newsletter? Share them with the team. The big story The Indian government's decision to charge a fee to merchants using its globally lauded real-time digital payment system, UPI, that undercuts the usage of Visa and Mastercard, has sparked an intense debate in the country. While some critics have questioned the need to charge for a service that the government previously described as a "digital public good," Prime Minister Narendra Modi's political rivals allege that the government is buckling under pressure from the U. S. On Tuesday, the National Payments Corporation of India announced that a 0.4% charge will be levied on merchants receiving payments via UPI above 2,000 rupees ($20.84). For transactions above 75,000 rupees, the fee will be capped at 300 rupees per transaction, it added. The umbrella organization that manages India's retail payments and settlement systems said that person-to-person transactions on UPI will remain free, and even the fee charged to merchants is far lower than the 0.9% on debit card transactions and 1.5%-2.5% on credit cards. Bouquets and brickbats Fintech companies have welcomed the move to charge a fee to merchants. "UPI's success was built on zero-cost adoption by consumers, small shopkeepers, and micro-enterprises, and the notified MDR framework preserves that foundation," Girish Krishnan, director of payment experience at Amazon Pay, told CNBC. Head of Meta's WhatsApp Pay Kunal Shah called it a "great move forward." Another popular payment app, Paytm, said that the measure will generate additional revenue from merchant business. In 2020, the Indian government cut the merchant discount rate, the fee incurred by merchants for accepting payments via UPI, to zero to promote digital transactions in the country. Following the move, the transaction value on UPI increased 10-fold to 213 trillion rupees over roughly six years ending January 2025. "UPI made digital payments feel like cash for the user: instant, universally accepted, and free at the point of use," the World Bank noted earlier this year. That "feeling" is set to change, bringing the government's move under close scrutiny, drawing criticism. Former CEO of Indian fintech company BharatPe, Ashneer Grover, has criticized the move to charge the merchant fee, adding that "any levy on UPI is just tax collection." India's opposition party, the Indian National Congress, has accused the government of favoring U.S. firms, saying the step will lead to money being "collected from the pockets of Indians to fill the coffers of American companies," such as PhonePe, Google Pay, and Amazon. Some commentators have said the move will encourage people to return to transacting in cash. Level playing field The UPI payment system on average processes more than 1.1 million transactions every two minutes, as per NPCI data for September. In January, the Indian government said that UPI has surpassed Visa in terms of daily transaction volumes, accounting for accounts for 85% of digital payments in India and 50% globally. Those figures caught the attention of the U.S. Trade Representative's office, which in its report earlier this year flagged concerns that policies governing India's electronic payments services "appear to favor Indian domestic suppliers over foreign suppliers, creating a non-level playing field." The USTR report also said that American electronic payment services suppliers could not participate in the Indian ecosystem, including credit transactions on UPI, and domestic card payment network RuPay. Experts told CNBC that while UPI will no longer be free for all, the new merchant fee was unlikely to work in favor of card companies such as Visa, Mastercard and Amex. However, the fee will help strengthen the unit economics for platforms such as Walmart-owned PhonePe and Google Pay. The two payment apps together account for nearly 85% of UPI transactions by value and 81% by volume, as per a report by Indian brokerage Ambit Capital. "A 0.4% rate severely undercuts credit cards at 1.5% to 2% and debit cards," Neil Shah, vice president of research at Counterpoint Research, told CNBC, adding that it gives merchants "every economic incentive to favor UPI rails." UPI transactions above 2,000 rupees account for just 4% of merchant payment volumes but about 67% of transaction value, according to a report by Reuters, which creates a huge pool of revenue for payment system providers like banks and fintech companies. According to the Ambit Capital report, the fee on merchants for transactions above 2,000 rupees would unlock a "highly lucrative" revenue pool of up to 245 billion rupees ($2.5 billion) for the sector. "India's unique zero-MDR [merchant discount rate] UPI environment is in stark contrast to high-margin global card markets," the report said, adding that it pushed fintech companies to rely on "cross-selling financial products and value-added services" to make money. Need to know India's retail inflation hits 4.8% in August, rises for 10th straight month India's headline rose to 4.82% in August from 4.45% in July, adding to pressure on the country's central bank to raise key benchmark rates. Inflation has been on the rise for 10 straight months in the world's fastest-growing major economy. Indian Prime Minister Modi says border peace is key to India-China ties Indian Prime Minister Narendra Modi on Saturday said that "peace and tranquility" in the border areas is essential for developing bilateral relations with its neighbor China. Ties between the two countries, which had deteriorated sharply following a deadly border skirmish in 2020, have been thawing for more than a year. Coming up Sept. 17: National Stock Exchange IPO opens. Sept. 23: HSBC Flash PMI for September.
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