UPI Service Charges: RBI Governor's Remarks Reveal Legal Framework Was Prepared Earlier

New Delhi: The possibility of imposing service charges on UPI transactions such as those made through Google Pay may have been legally enabled by the Centre well before the issue came into public discussion. RBI Governor Sanjay Malhotra's remarks following the monetary policy announcement have now brought attention to an earlier legal amendment that created scope for introducing charges on UPI payments.

Malhotra said no final decision had been taken on imposing fees on UPI transactions. However, he noted that if charges are introduced, it is too early to say who would ultimately bear the cost.

Legal provision already amended

UPI transactions have operated under a zero-MDR framework since January 1, 2020. The policy was introduced to encourage wider adoption of digital payments and discouraged banks and payment service providers from charging fees for UPI transactions.

The framework was linked to Section 10A of the Payment and Settlement Systems Act, 2007, which prevented banks and payment system operators from imposing charges on payments and receipts through prescribed electronic modes, including UPI.

However, a subsequent amendment created room for the government to introduce a Merchant Discount Rate (MDR) in the future if required.

Responding to questions on the amendment introduced by Finance Minister Nirmala Sitharaman, Malhotra clarified that it did not immediately impose an MDR on UPI transactions but gave the government the legal authority to introduce one if necessary.

Who could bear the cost?

At present, UPI payments remain free for consumers and merchants, unlike credit and debit card transactions where merchants pay MDR. The zero-cost model has been one of the major factors behind the rapid adoption of UPI across India.

There are now indications that any future charges could initially target high-value merchant transactions rather than person-to-person transfers. Large malls, supermarkets and major online shopping platforms could potentially be brought under such a system, with transactions above ₹2,000 reportedly being considered. A possible MDR in the range of 0.3% to 0.5% has also been discussed, although no final decision has been announced.

The key question is whether the charge would ultimately be absorbed by merchants or passed on to consumers.

Concerns over gradual introduction

The debate has drawn comparisons with charges introduced for ATM services and minimum-balance requirements. Critics argue that such charges can initially be presented as a way to recover operational costs before gradually being passed on to customers.

Banks and payment companies already incur costs in maintaining digital payment infrastructure. However, critics point out that the expansion of digital transactions has also reduced the costs associated with branch-based banking, including manpower and physical infrastructure.

The concern, therefore, is that after consumers have been encouraged to use UPI for everything from small retail purchases to public transport payments, introducing charges could eventually increase the financial burden on users. For now, there is no confirmed decision to impose UPI charges. The RBI governor's remarks, however, have renewed debate over the legal changes that have already created a route for such a move.