India introduces fees on UPI transactions, boosting PhonePe and Google Pay revenue

by@Reuters

Summary

India will charge a 0.4% merchant fee on Unified Payments Interface (UPI) transactions exceeding 2,000 rupees starting October 15, ending a six-year period of free transactions. This regulatory change, aimed at generating up to $1.1 billion a year by March 2028, is expected to primarily benefit the dominant UPI apps, PhonePe and Google Pay, which handled 80% of UPI payment values last month. As these apps leverage the new revenue to expand into rural areas, smaller providers are shifting their focus toward higher-value transactions and additional financial services to remain competitive. While there are concerns about merchants potentially passing costs onto consumers, many, including retail managers and shoppers, express confidence that use of UPI will remain prevalent despite the introduction of fees.

Analysis

PhonePe: PhonePe is a leading digital payments platform in India backed by Walmart. It processes the largest share of UPI transactions and will gain substantial new revenue from the introduction of merchant fees on larger payments starting in mid-October. The company views the change as a way to cover operational costs while supporting further expansion. Google Pay: Google Pay is a major digital wallet and payments app active in the Indian market. It ranks alongside PhonePe as one of the two dominant players in UPI volume and stands to capture a significant portion of the new merchant fee revenue pool. The platform is positioned to use additional income to pursue growth in underserved areas. Rahul Chari: Rahul Chari is the co-founder of PhonePe. He publicly welcomed the regulatory decision to introduce merchant discount rates, describing it as a positive step toward sustainability for the payments ecosystem. Unified Payments Interface: Unified Payments Interface is India's flagship real-time digital payments system operated by the National Payments Corporation of India. It has enabled free person-to-person and person-to-merchant transfers for six years and is now transitioning to a model that permits limited merchant fees on higher-value transactions. The system underpins everyday payments across urban and rural India. Regulation: Indian regulators have ended the zero-fee era for UPI by permitting a merchant discount rate on transactions above a certain threshold beginning in mid-October. Competition: Smaller UPI providers are shifting focus toward higher-value payments and additional financial services to offset the advantages now accruing to market leaders. Market Position: The two largest UPI apps are expected to capture the majority of new fee revenue, strengthening their ability to expand services and reach more users.

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