India: Half of Street Vendors May Cut UPI Use if 0.4% Merchant Fee Arrives, ISB Finds
India’s plan to charge merchants a fee on larger Unified Payments Interface (UPI) payments could hit the country’s smallest sellers harder than expected. A new survey of 722 street vendors by the Indian School of Business (ISB) finds that 45% to 53% of them may cut back on accepting UPI if the proposed 0.4% charge goes ahead, with many ready to fall back on cash.
Key facts
- The study was run by ISB’s Centre for Analytical Finance (CAF), which surveyed 722 street vendors across 14 states and union territories by phone between late September and mid-October 2026.
- The proposed merchant discount rate (MDR), announced in September, is 0.4% on UPI person-to-merchant payments above ₹2,000. Smaller payments stay free, and the fee is meant to be paid by the business, not the customer.
- The charge was due to start on 15 October, but the National Payments Corporation of India (NPCI), which runs UPI, postponed it until after Diwali.
- Nearly 70% of vendors pay their suppliers more than ₹2,000 at a time, so those purchases would fall inside the fee, even though most of their own small sales would not.
- About 10% of vendors said suppliers had already asked them to pay extra for using UPI in the 10 days before they were surveyed.
The problem is upstream, not at the counter
UPI is India’s real-time payment system that lets people pay from their bank account by scanning a QR code or entering a phone number. Since its launch it has been free for merchants, which helped it spread from big shops to tea stalls and vegetable carts. An MDR is the small percentage a merchant pays on each card or digital payment it receives; it is how banks and payment apps earn money from processing.
The government’s design exempts payments of ₹2,000 or less, which covers most everyday retail purchases. The ISB authors argue that this protects the vendor’s sales but not the vendor’s buying. A street seller who restocks from a wholesaler with a single large payment is now the merchant’s customer, and the supplier may try to pass the fee back. Co-author Anand Sudhakaran gave an example: on a ₹15,000 stock purchase, a 0.4% fee is about ₹60, a big bite for a vendor whose net margin is around ₹1,000 a day.
According to the researchers, every respondent said they would switch to cash if a supplier added a charge for UPI payments.
Who uses UPI today
Digital acceptance is still uneven. The survey found 82% of vendors in India’s largest (Tier 1) cities take digital payments, against 66% in Tier 2 and 64% in Tier 3 cities. Awareness of the proposed fee followed the same pattern: 66% in Tier 1, 55% in Tier 2 and 47% in Tier 3.
Some vendors also misunderstand the rules. A share said they would simply add the charge to customers’ bills, even though merchants are not allowed to pass the MDR directly to buyers.
Why it matters
Supporters of the fee say UPI needs a revenue stream to stay sustainable, since banks and apps carry the cost of running it. CAF director Prasanna Tantri said the debate needs “proper accounting” that weighs UPI’s benefits as well as its costs. He noted that UPI payment records help lenders judge small businesses’ cash flow, so a slide back to cash could weaken financial inclusion, transparency and access to formal credit.
The question matters beyond India. As real-time QR payment systems grow across Asia, regulators face the same trade-off: someone has to pay to run them, but fees can push the smallest merchants back to cash. India, home to the region’s largest instant-payment network, is a test case for whether a threshold-based fee can balance the two.
The ISB team recommends piloting the charge on a limited basis first, tracking supplier surcharges, price changes and any shift to cash, and commissioning an independently reviewed study of what UPI actually costs to run.
What to watch
- Whether NPCI announces a new start date for the 0.4% fee, or changes its design after the post-Diwali deferral.
- Whether policymakers adopt ISB’s call for a limited pilot and an independent cost study before a full rollout.
- Signs of suppliers adding UPI surcharges, and any drop in digital acceptance among small vendors in Tier 2 and Tier 3 cities.
Related: India: UPI Hits Record 25.47 Billion Payments in October and Lender Fibe Gets NPCI Nod to Run UPI Payments.
Sources: Business Today (Nov 2026), BW Businessworld (Nov 2026), UNI (Nov 2026).
