India's latest shift in UPI economics is likely to do more than alter merchant payment costs. It may harden the market structure itself, reinforcing the position of the country's two largest consumer payment apps while raising the bar for smaller rivals trying to survive in a scale-driven business.
According to Bernstein estimates, PhonePe and Google Pay could collectively earn about $900 million annually by March 2028 under the new merchant fee regime. The policy applies a 0.4% fee on merchant transactions above Rs 2,000, a change that introduces a direct revenue stream into a system long celebrated for being low-cost, frictionless and widely accessible. For the largest platforms, that shift is not merely incremental. It creates a monetisation layer that rewards transaction volume, merchant reach and user frequency — all areas where incumbents already hold decisive advantages.
Incumbents Gain Leverage
The immediate effect of the fee structure is likely to be asymmetric. Large platforms such as PhonePe and Google Pay already command enormous user bases, dense merchant acceptance networks and strong brand familiarity. Those advantages matter even more when a payment system begins to generate revenue from merchant transactions, because scale now translates into income rather than just market share.
Bernstein's projection suggests that the new regime could turn UPI from a largely loss-leading distribution channel into a more durable business line for the biggest players. That, in turn, may allow them to invest more aggressively in merchant acquisition, incentives, product development and regional expansion. Smaller competitors, by contrast, may find themselves squeezed between thin margins and the need to spend heavily to remain relevant.
The policy could therefore entrench a familiar pattern in India's digital economy: a winner-takes-most market where network effects compound over time. In payments, the value of a platform rises with the number of users and merchants on it. Once a few apps dominate both sides of the network, challengers face a steep climb to dislodge them, especially if the economics begin to favour scale.
Rural Push, Higher Ticket Sizes
The new fee structure may also influence how payment apps grow beyond urban centres. Bernstein expects the regime to encourage platforms to expand more aggressively in rural areas, where merchant penetration remains uneven and transaction values are often lower. If platforms can increase the number of merchants and users in these markets, they can build a broader base of fee-generating transactions over time.
At the same time, the 0.4% fee on merchant payments above Rs 2,000 may push apps to focus more on higher-value transactions. That could mean a greater emphasis on categories such as electronics, travel, fuel, auto-related spending and other merchant segments where average ticket sizes are larger. For smaller rivals, this creates a strategic dilemma: either chase low-value transactions with limited monetisation or pivot toward premium merchant categories where competition is likely to intensify.
For India's mobility and automotive ecosystem, the implications are notable. UPI has already become central to how consumers pay for fuel, servicing, accessories and increasingly for EV-related purchases and charging. A fee regime that rewards higher-value merchant transactions could make these categories more attractive to payment platforms, potentially improving acceptance and integration across the mobility value chain.
Competition Under Pressure
The broader question is whether the new regime will widen the gap between dominant platforms and everyone else. In a market where trust, convenience and ubiquity are essential, incumbents are already difficult to challenge. A monetisation model that strengthens their balance sheets could make that challenge even harder.
Smaller payment apps may still find opportunities, but they are likely to be narrower and more specialised. Some may focus on niche merchant segments, regional markets or differentiated services rather than direct competition with the giants. Others may be forced to pursue higher-value transactions in order to improve unit economics, even if that means abandoning the mass-market strategy that once defined UPI's promise.
The policy also raises a larger structural issue for India's digital public infrastructure. UPI was built to scale inclusion, reduce friction and keep costs low for consumers. Introducing merchant fees on larger transactions may be a pragmatic step toward sustainability, but it also changes the competitive logic of the system. The winners are likely to be the platforms already best positioned to convert scale into revenue.
For now, the message from the market is clear: India's UPI ecosystem is not becoming less competitive. It is becoming more selective. And in that environment, the biggest players may only get bigger.