PhonePe CEO Defends UPI Fee Model, Says Industry Needs Commercial Revenue to Sustain Growth

PhonePe co-founder and CEO Sameer Nigam defended the government’s decision to reintroduce a merchant discount rate (MDR) on select UPI transactions, arguing that the digital payments ecosystem requires a sustainable revenue model rather than continued government subsidies.

In interviews with India Today and CNN-News18, Nigam said the industry, comprising banks and fintech companies, spends roughly ₹10,000-12,000 crore a year to operate the UPI ecosystem at current volumes, while government compensation has fallen short. He noted that the government paid ₹3,900 crore in FY24 and that the figure crossed ₹7,800 crore by FY25-26. Fully compensating the industry could require ₹10,000-14,000 crore, Nigam said.

“We don’t want subsidies from the government,” Nigam said, arguing that payment companies are for-profit businesses that raise equity and debt and should sustain themselves through operations. He added that the industry has invested nearly $5 billion in equity over the past five to six years, yet banks and fintechs continued to report losses on their UPI businesses. “At today’s volumes, paying ₹2,000 crore in subsidy doesn’t cut it. We are all bleeding money,” he told India Today.

**Revenue Opportunity**

The return of MDR on UPI after six years could generate ₹15,000-20,600 crore in annual revenue for India’s digital payments and banking ecosystem, according to brokerage estimates reported by Business Standard. Brokerages expect banks to receive the largest share of the levy, while fintechs such as Paytm and Pine Labs could gain from higher transaction-linked revenue.

**How the New MDR Works**

The National Payments Corporation of India (NPCI) has notified a 0.4% MDR on specified person-to-merchant (P2M) UPI transactions above ₹2,000. Person-to-person payments, small-value vendor transactions up to ₹2,000, and small merchants receiving under ₹1 lakh monthly remain 100% free. The charge applies only to the portion above ₹2,000 and is capped at ₹300 per transaction for retail categories.

Nigam said about 95-96% of P2M transactions by volume are below ₹2,000, meaning most everyday payments — for groceries, autorickshaw fares and public transport — will not be affected. However, transactions above ₹2,000 account for only about 4% of volume but represent roughly 66% of the total value of UPI payments.

**Merchant and Consumer Impact**

Nigam stressed that charging customers a surcharge specifically for UPI payments is illegal under the relevant NPCI circular, and the responsibility to prevent such practices rests with acquiring banks and payment aggregators.

He argued that the likelihood of indirect cost transfer is limited because several categories have been given specific caps. Bill payments, insurance and petrol transactions have a ₹5 cap, while stockbroking carries an MDR of just 0.02%. Retail, clothing, dining, travel and entertainment have higher margins and already compete with card and wallet payments where MDRs are higher, he added.

**Distribution of MDR Revenue**

Nigam outlined the revenue-sharing structure under the new framework. The customer’s issuing bank will receive 40% of the MDR, the PSP bank 10%, and third-party application providers (TPAPs) such as PhonePe and Google Pay will receive 20%. An NPCI provision withholds 5% of the relevant revenue to support the growth of small merchants.

**Comparison with Other Payment Networks**

Nigam described the proposed 0.4% MDR as the lowest among payment networks globally. He noted that merchants accepting credit cards, RuPay cards and wallets already pay interchange rates that can be significantly higher, while debit cards have an interchange rate of around 0.65%. RuPay credit cards on UPI carry an MDR close to 2%, he said. “0.4 is nothing,” Nigam told CNN-News18, arguing the focus should be on creating a sustainable model that allows continued investment.

**Rejection of Subsidy Model**

Nigam pushed back against criticism from former BharatPe co-founder Ashneer Grover and others who argued that imposing charges on UPI effectively amounts to tax collection. He said the criticism overlooks the fact that the government has been subsidising the industry since MDR was made zero in 2020.

“We don’t want to be beholden to government subsidies,” Nigam said, adding that the industry would rather operate as a commercial business. He questioned why UPI should remain free for merchants when other payment instruments such as RTGS, cards and wallets attract charges.

Nigam also argued that zero MDR was not the primary driver of UPI’s success. He pointed out that UPI had an MDR of 0.65% between 2016 and 2020, and that the single most popular use case — peer-to-peer transfers — has always been and will remain exempt from MDR. UPI’s success, he said, was driven by its low-cost QR-based acceptance network that turned small vendors into digital payment merchants. “The dream was never 500 million Indians. The dream is a billion Indians on UPI, and that requires more capital,” he said.