A Public Good Needs Funding. Who Should Actually Pay For It?

Free Isn't the

Same as Costless - Someone Is Already Paying for UPI UPI transactions cost nothing at the counter, but they are not actually free - someone pays for the switch that moves your money, the servers that keep it running, the fraud checks that keep it safe.

Today, that someone is the government, through a shrinking incentive scheme and the banks, who absorb the rest. Parliament's recent amendment to Section 10A of the Payment and Settlement Systems Act does not impose a fee today.

But it removes the absolute legal bar that made a fee impossible and quietly hands government the power to notify one whenever it chooses.

Why a Card-World Fee Doesn't Fit a Phoneless-Terminal System

The instinct to reach for a Merchant Discount Rate comes from the card world, where an issuer, an acquirer and a network each did real work and bore real risk - a physical terminal, a credit-default exposure, multiple intermediaries taking a cut.

None of that infrastructure exists on UPI. The "terminal" is the customer's own phone, on data they already paid for. There is no card to issue, no default risk to price in and settlement is instant. Applying an MDR here isn't recovering a real cost of doing business - the actual cost of running the system, by the NPCI's own numbers, comes to roughly two paise a transaction.

A fee modelled on card economics for a system with none of the card economics would tax something that costs almost nothing to provide.

Who Actually Benefits and Why That Matters

The savings UPI generates don't mostly land with merchants - they land with the state and the banks. The RBI alone spends thousands of crores a year just printing currency notes, before counting the cost of storing and moving cash physically across the country.

Banks save even more per transaction compared to a teller counter or an ATM withdrawal and they gain something less visible but larger: money that stays in accounts, earning them a spread, instead of sitting idle in someone's pocket.

If the biggest beneficiaries of digitisation are the state and the banking sector, taxing the smallest merchants to fund the rails inverts who should actually be paying. This is where the exam-relevant insight sits: a Digital Public Infrastructure debate is rarely actually a debate about whether the infrastructure needs funding - everyone agrees it does.

It is a debate about whether the state treats savings it captures elsewhere as its own to keep or as a pool it owes back to the system that generated them. UPI's zero-MDR bargain - that digital will never cost more than cash - is precisely the kind of trust that, once broken even slightly, is difficult for a price-sensitive economy to rebuild.