Hi everyone,  

Welcome to the 166th edition of The Pattern, a weekly newsletter where we dive into the latest from the world of economy, technology and finance. Let’s get right into it! 
To most users, UPI feels like magic. Instant, reliable, and free. Whether it’s a ₹20 chai or a ₹2,000 cab ride, payments happen with a tap of the button. But behind that ease lies a sophisticated ecosystem that costs significant sums of money to run. Servers, security, APIs, compliance — they all add up. 

And yet, on the surface, no one’s paying for it. So, who is? 

The poster child 

UPI is the success story of India's digital infrastructure, used by everyone from roadside vendors to mammoth e-commerce platforms. Its ease and zero-cost experience have driven mass adoption. But that very success has created a new challenge: high usage puts a growing load on banks, intermediaries, and infrastructure. And with no direct revenue from customers, the question is becoming harder to ignore — how long can UPI remain free and fully functional? 

"There are costs, and these costs have to be paid by someone. Who pays is important, but not as important as the fact that someone must foot the bill. For the sake of sustainability, whether collectively or individually, someone has to pay for it." Said RBI Governor Sanjay Malhotra at the post-Monetary Policy Committee (MPC) press conference. 

The current trends

Until this month, records show that the transaction volumes dipped marginally by 1.5%, at 18.4 billion transactions, down from May's record 18.68 billion. The total transaction value also slipped by 4%, settling at ₹24.04 trillion, compared to ₹25.14 trillion in the previous month. But let's not mistake a monthly dip for a slowdown.

On a Y-o-Y basis, UPI continues to surge—volumes are up 32%, and the overall value of transactions has jumped 20% compared to June last year. While total volumes dropped, daily average transactions rose to 613 million, up from 602 million in May.

UPI may appear seamless: scan, tap, done. Behind the scenes, it's not as simple as it looks. Banks bear substantial costs to maintain and process UPI transactions, including paying switch fees to NPCI—which may prompt them to pass these costs on to payment aggregators.

The hidden layers

The first layer of cost lies in technology infrastructure.

Banks are required to maintain servers, built for high uptime, and protect their systems against cyber threats. Then comes the processing and settlement layer, where transactions are routed through banks, payment aggregators, and NPCI's switching network in milliseconds. Each of these hops adds to the cost of a single 'free' transaction.

Next, there's the regulatory cost: KYC, fraud monitoring, compliance reporting—all essential and resource-intensive. Add to this the cost of merchant onboarding, dispute resolution, and customer support.

Who's footing the bill?

That would be the government. For now.

"I never said UPI cannot remain free forever. My point was that it is not entirely free even now—the government is subsidising it. The real question is: who pays?,” said Malhotra.

At the moment, however, neither merchants nor users bear any costs thanks to zero MDR.

As per the RBI chief, "I never said users will have to pay. What I did mention is that the government's policy has been instrumental in expanding the use of UPI."

The government incentive that once supported UPI for banks is now becoming slim. This subsidy, paid by the Finance Ministry to banks for processing small-value UPI transactions (up to ₹2,000) at small merchant outlets, was slashed from 0.25% to 0.15% per transaction this year. In addition, the total budget allocated for digital payment is now down to ₹1,500 crore for FY25 from ₹3,500 crore the previous year.

The shifting tide

This signals a clear shift. Banks, who already bear the brunt of infrastructure, switch fees, and fraud management without earning direct revenue from UPI transfers, are now being nudged toward cost recovery.

Currently, banks also pay a fee to access the UPI switch — the central system managed by NPCI that routes transactions between banks and apps. With subsidies shrinking, the pressure to find new revenue sources is mounting.

Which brings us to the next link in the chain—payment aggregators (PAs).

The heat is rising

In August 2025, after Yes Bank and Axis Bank, ICICI Bank began charging PAs, like Razorpay, Google Pay, and PhonePe, for UPI merchant transactions. The structure is tiered:

With escrow: ₹0.02 per ₹100 (capped at ₹6)

Without escrow: ₹0.04 per ₹100 (capped at ₹10)

The same doesn't apply if the merchant settled directly into an ICICI account—a subtle incentive to deepen bank-merchant relationships.

The PAs, in turn, charge merchants with platform fees, altered commission structures, and revised contracts—the outcome is the same. According to industry sources, PAs may pass these new costs to merchants or absorb them, depending on agreements in place. Large and mid-sized merchants, especially those operating online, are starting to feel the pinch.

The whole ecosystem is now under immense pressure.

A familiar story

We’re seeing echoes of it in another public digital initiative: the Account Aggregator (AA) framework. Like UPI’s zero-MDR model raised questions about long-term sustainability, the AA is also facing similar challenges.

A key concern is incentive-sharing, especially for Financial Information Providers (FIPs), who risk losing market share to potential competitors by sharing customer data with others. To address this, the ecosystem needs a fair pricing model: one that rewards FIPs for sharing data, pays Financial Information Users (FIUs) for broadening new customer bases, and supports AAs for facilitating secure and fast data flow—all without overburdening any one party. Without a balanced incentive model, the AA framework risks running into challenges similar to those faced by UPI.

The cost beneath the convenience

UPI has changed the way India pays: fast, frictionless, and free. But behind the scenes, the cost of keeping that engine running is growing heavier by the day. The banks have absorbed it, and the aggregators are feeling it now.

The only question remains: Who pays next and how soon?

If this pressure continues to mount without a fair cost-sharing model, even the most successful public digital infrastructure can crumble under its own weight.

That's a wrap for this week. As always, leaving you with a few reads to explore. Have a great weekend!

Reading List:

1. No worries over credit demand growth: Guv

2. RBI's panel for continuation of Weighted Average Call Rate as operating target of monetary policy

3. RBI announces three consumer-centric steps for re-KYC, easier bank claims and retail investing

4. Suitcases over stethoscopes: Travel loans beat medical and home needs, study shows

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on X here and follow FinBox on LinkedIn to get the latest updates.

Cheers,

Mayank