Why UPI surcharges are a bad idea

The Lok Sabha recently passed an amendment to a law to make it legal to levy surcharges or fees on any UPI and RuPay debit card transactions. The government, meanwhile, announced that it proposes to do so only for purchases of ₹2,000 and more from businesses with a threshold of turnover. But with the legal bar removed, government decisions can change any time.

The stated logic, as the Reserve Bank of India (RBI) Governor Sanjay Malhotra recently put it, is that “somebody has to pay” for UPI. The Indian government is said to have subsidised UPI by about ₹2,000 crore in the past one year.

Let us first examine the stated reason, and then come to what most knowledgeable people think is the real reason.

Digital payments such as UPI and debit cards replace the centuries-old payment system of bank notes and coins. The latter can be called physical currency as against the new digital currency. Who paid for the bank notes payment system? The RBI printed notes and minted coins and gave them to the banks for no charges. One can walk into a bank and demand currency notes for all the deposits one held, and they would have to be made available free of charge, even in the precise denominations asked for, subject to availability (though the printing and logistic costs of small notes for the same amount is much more than of big notes).

So, if the government — through the RBI — funded the earlier/ traditional payments system, or more widely, the cost of the “operating medium” of economic exchanges, what prevents it from doing it now as well. What has changed? In fact, a digital “payments system” is far less costly, and much more efficient, than a physical currency-based one.

What is a digital payment system? A user is at a shop and wants to make a purchase. She gives a secure message to her bank to withdraw and spend her own money. Instead of the bank handing them the needed cash, and user giving it to the merchant, and the merchant then depositing it in his bank — a tedious, and quite costly process — a set of instant secure messages just ensures that the user’s account is debited and the merchant’s, perhaps in another bank, credited the same amount. Why should this relatively trivial and inexpensive process — replacing a much more cumbersome and costlier one — be required to separately be paid for, when cash movement itself was not paid for?

If the government spent ₹2,000 crore on UPI last year, it also saved nearly ₹1,500 crore over the same time in reduced expenditure on printing currency notes. This saving is going to go up fast, as digital means replace currency, while UPI operating costs could remain similar, or actually come down as technology advances. If digital systems incur costs on security, physical cash systems also require them, even if of a different kind.

Public goods are generally free

But why should the government make such expenditures at all without recouping them, if possible? There is a very sound economic logic for it. Less or near-nil friction in the payments system, through zero costing of transactions, considerably increases economic flows. The overall economy benefits multiple times more than any possible collection of transaction surcharges. This is the typical public goods logic. This is why governments erect lighthouses on the shores and develop parks in cities. Charging users for such services tend to reduce or distort their use and benefits to such an extent that it is judged unfavourably.

First-time visitors to some European cities are pleasantly surprised when their hotel gives them a transport pass for their entire stay, which is provided free by the city. Such a free pass greatly increases the mobility of the tourists through the city, rather than them scouring for change for every small ride. Tourists moving around spend more money, and do it across the city. The overall economy of the city benefits a lot. Even the government is likely to get back more in sales taxes from such extra spending than what they lost in providing free transport passes.

Similarly, the way increased mobility can increase economic activity — which is why many countries have traditionally subsidised motor fuel — reduced friction in economic transactions does it even more. That is why bank notes were never charged for their production and logistic costs. There is no reason that governments and central banks should charge for the less costly and much more efficient (economic activity expanding) digital payment system. As said, that is just sound economic logic.

If banknote payments require no surcharges or fees, why should digital payments incur them, in a digital world? After all, digital payments means less work and less costs of all kinds for almost everyone involved. When the public goods argument works for physical currency, why should it fail for digital currency?

The real reason

Let us now move to the real reasons for what is happening. Many countries such as Brazil, Indonesia, Vietnam, Turkey, and so on, now have a UPI-like system. Both India and Brazil have repeatedly been named in U.S. official documents regarding their digital payment systems being “unfair trade practices”. In July 2026, the U.S. government imposed a 25% tariff on a range of imports from Brazil, explicitly citing Brazil’s free, state-run instant payment system, Pix, as an unfair trade barrier that disadvantages American financial companies such as Visa and Mastercard.

The India-U.S. trade deal is nearly ready, though its details remain secret. India is currently checking the boxes on U.S. demands. It can be said with almost complete certainty that India has bent where Brazil stood firm. This is why it amended the law which disallowed surcharges on UPI. So that Visa and MasterCard do not suffer. One already sees at retail stores and petrol pumps, merchants making excuses that their credit card machine is not working, and preferring UPI payments, which saves them a considerable surcharge. U.S. President Donald Trump could not let top U.S. financial corporations lose major markets.

When U.S. credit companies emerged, it was a digital innovation over a mainstream physical currency system. Making instant secure communication for payments was quite expensive. Today, it is a rather trivial technology, and the system is much cheaper than physical currency. Also, digital is mainstream today. Some banks worldwide charge for physical interactions, while providing the digital ones free. India suddenly now bringing in fees for digital payments is going against both the economic and technological logic.

Let UPI remain a public good

One thing the Indian government has boasted about the most in the last many years, nationally and internationally, is India’s UPI. It is shocking that under U.S.’s pressure India is willing to change the basic logic and architecture of its most vaunted achievement. Just so that the business model of Visa and Mastercard is not affected. This does not speak well about Indian sovereignty. If Brazil could stand firm, why cannot India?

By banning surcharges or fees on UPI, India will continue to reap the immense gains in terms of economic ease, efficiency and expansion that come from it. UPI is today also a matter of inclusion and social justice. We need not import the U.S. model which wants to see everything, even payment systems, as a market good. UPI should stay a public good, and free.

Parminder Jeet Singh is a Delhi-based digital society researcher and activist

Published – August 13, 2026 12:04 am IST