Are We Turning Back to Cash as UPI Comes at a Cost?

Dr. P. S. Vohra
Author, Financial Expert & Regular Newspaper Columnist

Until now, the common perception has been that making payments through UPI is almost entirely free. Under the government’s new framework, however, that picture is set to change. From October 15, 2026, merchant payments will no longer be completely free of charges. While person-to-person transactions will remain free and merchant payments up to Rs 2,000 will continue to be free, charges will apply to certain merchant transactions above Rs 2,000.

The government has clarified that the charge will not be collected separately from the customer and will not be treated as a tax. Yet the decision raises a larger question: UPI was built as one of India’s most important pieces of public digital infrastructure. How, and ultimately by whom, will the cost of sustaining it be borne?

The UPI story is not merely about charges. It is the story of a transformation that changed the way India makes payments. When UPI was launched in April 2016, only 21 banks were part of the system. In August 2016, its first month of operations recorded around 90,000 transactions. The beginning was modest, but what followed was an extraordinary acceleration.

Demonetisation and the Pandemic Changed the Payment Landscape

On November 8, 2016, the government announced the withdrawal of Rs 500 and Rs 1,000 notes from circulation. Cash availability suddenly became constrained, creating a vast new market for digital payments. Digital payment platforms such as Paytm recorded rapid growth during this period and reported sharp increases in transactions and users. This was the phase when digital payments ceased to be merely an alternative form of convenience and became an important part of everyday economic activity.
UPI continued to reach new milestones. In October 2019, monthly transactions crossed one billion. By February 2020, transactions had risen to around 1.32 billion. The Covid-19 pandemic and the nationwide lockdown then brought another major shift in payment behaviour. Even in April 2020, UPI recorded around one billion transactions. By October 2020, monthly transactions had crossed two billion, and by December 2020 they had reached approximately 2.23 billion.

The growth accelerated further. In financial year 2025-26, UPI accounted for around 84 per cent of the country’s total digital payment transactions. In July 2026 alone, UPI processed around 23.66 billion transactions, with a total value of approximately Rs 29.88 lakh crore.
A system that began with a few thousand transactions had, within a decade, become a channel for monthly economic transactions worth several lakh crore rupees.

The Real Cost of UPI
UPI may be almost free for the consumer, but operating it is certainly not free. Servers, technological infrastructure, cybersecurity, fraud prevention systems, banking networks, customer support and the capacity to handle an ever-growing volume of transactions all involve substantial expenditure.
According to figures placed before the Parliamentary Standing Committee on Finance, the estimated annual cost of operating UPI is around Rs 20,700 crore, while the government has provided approximately Rs 2,000 crore for it in financial year 2026-27.
This raises a basic economic question: if the consumer is not paying and the government is not fully bearing the cost, where, ultimately, does the remaining economic burden fall?

Why Are Private and Foreign Platforms Ahead of the Public System?
India created the UPI infrastructure, but the consumer-facing payment market has increasingly come to be dominated by private platforms. PhonePe and Google Pay together account for around 80 per cent of UPI transactions. PhonePe has significant ownership by US-based Walmart, while Google Pay is part of Alphabet, the US technology company.
Paytm, which expanded rapidly after demonetisation, also developed into a major private digital payments business and became a listed company through its initial public offering in 2021.
This creates an uncomfortable policy question. If India built the underlying digital payment infrastructure, why has a substantial part of the commercial benefit accrued to private companies, including platforms backed by foreign capital?
The government created BHIM. Public sector banks have millions of customers. SBI developed YONO as its own digital platform. Yet public platforms have struggled to match the scale of private applications. SBI Chairman C. S. Setty has himself acknowledged that the bank has fallen behind in the digital payments race.
When the infrastructure was Indian, the customers were largely Indian and the banks were Indian, why have Indian public platforms failed to occupy a leading position?

Will the Impact of the Charge Really Remain Limited to Merchants?

Under the new framework, merchant payments up to Rs 2,000 and transactions involving small merchants will remain outside the charge. According to the government, around 96 per cent of merchant transactions will not be affected.
However, certain merchant transactions above Rs 2,000 will attract a charge of 0.4 per cent, with a maximum of Rs 300 for transactions of Rs 75,000 or more. In certain specified sectors, the charge will be Rs 5 per transaction, while capital-market-related transactions will attract 0.02 per cent, subject to a maximum of Rs 300.
A merchant cannot directly recover this charge from the customer. But economic behaviour is rarely so straightforward.
A merchant may absorb the additional cost, adjust it against another business expense or reconsider prices in the future. It would be premature to conclude that the change will lead to higher inflation. But it is equally important to ask where the final economic burden of a growing digital payment system will ultimately fall.
There is an even larger question. If merchants begin to view digital payments as a regular operating cost, will they continue to embrace UPI with the same ease as before? Could some businesses begin exploring alternative payment methods for larger transactions?

This is where the entire story of UPI since 2016 comes back into focus. India’s digital payment revolution succeeded because it reduced friction. The challenge now is to ensure that the economics of sustaining that revolution do not recreate the very friction that UPI was designed to remove.
UPI has become far more than a convenient payment mechanism. It is now woven into the everyday functioning of India’s economy. Its next challenge, therefore, is not simply to process more transactions, but to find a sustainable economic model without undermining the simplicity and accessibility that made it a transformative public infrastructure in the first place.