UPI's growth stalling: Can Budget save India's digital payment system?
18 Jan 2026

India's Unified Payments Interface (UPI) has revolutionized the country's digital payment landscape, but it is now facing a major challenge.

The growth of UPI's merchant network, a key driver of its success, has been slowing down in recent years.

According to an analyst's data, the active merchant QR network has only grown at about 5% CAGR over the last three years.

Only 45% of merchants accept UPI payments
Merchant acceptance

Despite its rapid growth, only about 45% of India's merchants accept UPI payments on a monthly basis.

The geographic distribution is even more concerning: nearly one-third of India's pincodes have fewer than 100 active UPI merchants and around 70% have fewer than 500.

This huge gap between potential and reality highlights the increasing strain on the system.

Zero-MDR policy: A double-edged sword
Policy impact

The government's zero Merchant Discount Rate (MDR) policy for UPI and RuPay debit card transactions has boosted financial inclusion. However, the financial burden of this policy is becoming unsustainable.

Each transaction under this scheme costs about ₹2 to process, a cost that banks and fintech firms have to bear entirely.

PhonePe, India's largest UPI platform, has said that the zero-MDR mandate in its current form is economically unviable.

PhonePe calls for cost-recovery mechanism
Financial sustainability

PhonePe has called for a cost-recovery mechanism, either through MDR or adequate government subsidies, to sustain the ecosystem at scale.

The company said that its FY23-24 incentive disbursal of ₹3,900 crore was insufficient to cover operational costs and this support fell sharply to ₹1,500 crore in FY24-25.

"This allocation falls far short of what's needed to build technical infrastructure," a PhonePe spokesperson told ET Online.

RBI governor emphasizes cost recovery for UPI sustainability
Cost recovery

RBI Governor Sanjay Malhotra has stressed that while UPI has created immense public good, its sustainability depends on someone paying for the costs involved.

"I never said that UPI can stay free forever. What I said was there are costs (associated with UPI transactions), and they need to be paid for by someone," he had said earlier this year.

Payments Council of India raises concerns over revenue model
Revenue concerns

The Payments Council of India (PCI) has also raised alarms over the lack of a sustainable revenue model for companies that build, operate and secure payments infrastructure.

"Sustaining long-term investments in payment processing, customer acquisition, and operational management remains a grave concern," PCI said.

For FY26, the government has allocated just ₹427 crore toward digital payments incentives, far less than what is needed to sustain growth in this sector.

PhonePe warns of funding gap and its impact
Funding gap

PhonePe has warned that without a significant increase in funding, the industry's growth momentum is at risk.

The platform noted that UPI has reached less than half of India's smartphone users and expanding into Tier-4 cities will require massive sustained investment in both merchant acceptance infrastructure and consumer education.

"Without adequate funding, both consumer acquisition in Tier 4 cities and beyond as well as merchant onboarding will suffer considerably," the company told ET Online.