New UPI fees on large transactions spark fintech stock rally

What has changed?

The National Payments Corporation of India (NPCI) and the Ministry of Finance have announced that a 0.4% Merchant Discount Rate (MDR) will be introduced on certain Person-to-Merchant (P2M) UPI transactions above Rs 2,000.

The new charge, which comes into effect on 15 October 2026, is capped at Rs 300 for transactions of Rs 75,000 or more.

Crucially, the fee will not be borne by consumers. The Ministry of Finance has advised banks to ensure merchants do not pass this charge on to shoppers. Person-to-person transfers will remain entirely free, as will transactions of Rs 2,000 or less, which the government says make up over 95% of UPI merchant payments. Small merchants who receive up to Rs 1 lakh a month through UPI QR codes are also exempt.

Why is the government introducing these fees?

For nearly seven years, UPI grew rapidly because it was fast and entirely free for both users and merchants, supported largely by government subsidies. However, with UPI now handling 70 to 80 crore transactions every day, the infrastructure demands have scaled dramatically.

The government stated that relying on subsidies alone is no longer viable to fund necessary upgrades in cybersecurity, fraud prevention, and cloud infrastructure. Reserve Bank of India (RBI) Governor Sanjay Malhotra summarised the dilemma in August, pointing out that "someone has to pay the cost" of maintaining such a massive network.

The central bank has backed the new framework, stating it will make India’s digital payments ecosystem structurally self-sustaining and encourage more private companies to invest in expanding the network.

Who stands to gain?

The announcement triggered a sharp rally in digital payment stocks on Wednesday. Shares in Paytm’s parent company, One 97 Communications, jumped more than 7% to hit a 52-week high of Rs 1,856.50. MobiKwik rose over 5% to Rs 213 on the BSE, while Pine Labs gained nearly 3% to reach Rs 199.

Financial analysts see the move as a major turning point for fintech profitability. Bernstein estimates that the new fees could generate a massive revenue pool, with banks receiving around Rs 14,000 crore, payment apps earning about Rs 7,000 crore, and the payment network taking Rs 1,000 crore.

Emkay Global Research raised its target price for Paytm to Rs 2,400, estimating the company could make Rs 1,120 crore in UPI merchant revenue by the 2028 financial year. It noted that the shift replaces unpredictable annual government subsidies with a steady, recurring commercial revenue model. JM Financial was similarly bullish, raising its Paytm target to Rs 2,150.

How has the industry reacted?

Fintech leaders have widely welcomed the decision. PhonePe co-founder and CEO Sameer Nigam called the move a "very positive step," noting that India was previously the only country in the world where such a massive digital payment system carried no merchant fees. He added that the 0.4% rate is among the lowest in the world, far below the 1.5% to 2.5% merchants typically pay to accept credit cards.

Upasana Taku, co-founder of MobiKwik, agreed that the change is essential for the industry's survival. She pointed out that the charge will primarily affect high-value transactions—like booking flights, shopping online, or buying expensive items in malls—which are well-suited to absorb a small fee to keep the underlying payment infrastructure running.