India’s digital payments ecosystem is confronting an unexpected test as authorities introduce fees on larger transactions through the Unified Payments Interface (UPI).
The shift has revived demand for physical currency, particularly within the country’s substantial informal economy, raising questions about whether the zero-cost model that propelled UPI’s dominance can endure.
From mid-October 2026, merchants accepting UPI payments above ₹2,000 face a 0.4 per cent merchant discount rate, capped at ₹300 on very large amounts, while everyday smaller payments and all person-to-person transfers stay free.
The change ends a zero-fee regime introduced in January 2020 to accelerate the move away from cash.
Although consumers are not charged directly, retailers operating on thin margins have little incentive to absorb the cost and may quietly steer customers toward notes and coins.
Traders’ groups have already indicated they will promote cash for higher-value purchases to avoid the levy, and some surveys suggest a notable share of users would switch to cash or cards if merchants pass on any expense.
The policy arrives against a backdrop in which currency in circulation continues to expand at double-digit rates—around 13 per cent year-on-year recently—even as UPI processes more than 24 billion transactions a month.
Reserve Bank of India officials have described this as a “cash paradox”: digital tools displace cash in routine payments, yet the stock of physical currency keeps rising because of precautionary holdings, rural demand, and activity that remains outside formal records.
The informal sector, which still accounts for a large share of employment and output, relies on cash for its flexibility, anonymity, and lack of settlement delays or fees.
High-value informal transactions—private tuition, home repairs, construction work, or certain professional services—have long preferred notes precisely because they leave no digital trail.
Financial technology companies and the UPI ecosystem have undeniably expanded financial inclusion.
Bank-account ownership has climbed sharply, and millions of small vendors now accept digital payments via simple QR codes.
Apps from PhonePe, Google Pay, and others lowered barriers for people who previously lacked easy access to banking services.
Yet for many households and small businesses, especially those in the informal economy or areas with uneven digital infrastructure, cash and cash-based transfers remain more practical.
They avoid smartphone dependence, data costs, connectivity issues, and any risk of fees or disputes.
Direct cash transfers under welfare schemes have also proven reliable where digital channels face last-mile challenges or trust deficits.
The new merchant fee, however modest, risks reinforcing that preference for larger transactions and could slow the formalisation that UPI helped achieve.
Whether the fee will meaningfully reverse UPI’s gains is uncertain—most transactions fall below the threshold, and consumer habits are sticky. Still, the episode underscores that India’s payments landscape will likely remain hybrid. Digital tools have widened access, but physical currency continues to serve practical needs that technology has not fully displaced.
