India's UPI Reform Sparks Controversy Over Fees for Large Businesses

India's Unified Payments Interface (UPI) has been at the center of controversy due to pressure from the US on its digital payments system. The UPI, which allows for instant transfers between bank accounts via phone numbers or merchant QR codes, has become a crucial part of India's financial infrastructure.

The Modi government is trying to find a solution to prevent the industry from choking under its own high-volume, zero-profit success. However, this fix involves charging some transactions that are currently free, which has sparked opposition and accusations of surrendering financial sovereignty to the US.

The US Trade Representative's 2026 report on foreign trade barriers singles out UPI over concerns that American electronic services suppliers cannot participate in it on a level playing field. The National Payments Corporation of India (NPCI), the quasi-government entity operating UPI, has its own RuPay cards that enjoy wider acceptance than Visa and Mastercard.

The change coming to UPI focuses on debit transfers, not credit cards. Person-to-person transfers make up 70% of total value and must remain free. The debate centers around the remaining 30%, which is over $1 trillion in annual merchant payments. Intermediaries were banned from charging sellers in 2020, allowing businesses to avoid card fees.

Walmart and Google drove UPI's expansion by gaining invaluable spending data on Indians. However, they came from the consumer side and earn nothing while moving nearly $1 trillion annually. Processing over 20 billion monthly transactions requires significant investment in servers, compliance, and cybersecurity.

A proposed solution is to allow a merchant discount rate of 0.3% to 0.5% on transactions over ₹2,000 ($21). This would generate revenue for banks and fintech firms while keeping small businesses unaffected.