India's decision to allow a merchant fee on certain Unified Payments Interface transactions is set to reshape the economics of digital payments, and not necessarily in a way that levels the field. Instead, the new regime may entrench the dominance of the largest players, particularly PhonePe and Google Pay, which already command the bulk of UPI traffic and are best positioned to monetise the shift, according to Bernstein estimates.
The brokerage projects that the two platforms could collectively earn about $900 million annually by March 2028 under the revised framework. The estimate underscores a central tension in India's digital payments policy: a system built on low-cost, mass adoption infrastructure is now moving toward a model that could reward scale, distribution and merchant reach. For the biggest incumbents, that is a meaningful tailwind. For smaller rivals, it may be a tougher road.
Scale Advantage Widens
The new fee applies at 0.4% on merchant transactions above Rs 2,000, a threshold that matters because it captures a segment of payments where merchants are more likely to absorb or pass on costs, and where platforms can extract more value from transaction volume. In practice, the rule may favour apps with the deepest merchant networks, strongest brand recognition and the broadest consumer habit formation. PhonePe and Google Pay, which have long dominated India's UPI ecosystem, fit that profile more than any rival.
That dominance is not merely a matter of market share. It is also about data, merchant integration and user trust. In a payments market where convenience and ubiquity matter more than flashy product differentiation, the largest apps can spread compliance, technology and sales costs across a much larger base. The fee regime therefore risks reinforcing a winner-takes-most structure, even as policymakers seek to sustain the rapid expansion of digital payments.
For smaller competitors, the economics are more complicated. The new regime may encourage them to focus on higher-value transactions, where fee income is more attractive and customer acquisition can be justified by stronger unit economics. But that strategy could also leave them competing for a narrower slice of the market, rather than challenging the leaders across everyday retail payments.
Rural Push, New Incentives
The shift may also alter how payment companies think about geographic expansion. Bernstein said the regime could encourage apps to expand more aggressively in rural areas, where digital payment penetration remains uneven and merchant acquisition is still a work in progress. If transaction monetisation improves, platforms may have greater incentive to invest in smaller towns and villages, where the next wave of UPI growth is expected to come from.
That matters because India's payments story is no longer just about urban convenience. The next phase is about widening usage beyond metro consumers and large merchants, into kirana stores, transport operators, service providers and informal businesses. A fee structure that creates revenue from merchant transactions could accelerate that push, especially if payment firms see rural expansion as a path to scale rather than a cost centre.
At the same time, the policy may sharpen competition around merchant acceptance rather than consumer acquisition alone. Payment apps that can sign up more merchants, deepen checkout integration and improve transaction frequency stand to benefit most. That dynamic could further consolidate the market around the largest players, while forcing smaller firms to choose between niche positioning and aggressive expansion.
Policy Meets Market Power
The broader significance of the fee shift lies in what it says about India's digital public infrastructure. UPI has been celebrated globally as a low-friction, high-volume payments rail that lowered barriers for consumers and merchants alike. But as the ecosystem matures, the question is no longer only whether payments are cheap and fast. It is also who captures the economic value created by that network.
In that sense, the new merchant fee regime may be a milestone in the commercialisation of UPI. It could help payment platforms move closer to sustainable monetisation, but it may also deepen concentration in a market already defined by a few dominant names. If Bernstein's projections prove accurate, the biggest winners will be the platforms that already sit at the centre of India's digital payments habit.
For policymakers, the challenge will be balancing revenue incentives with competition and inclusion. A fee regime that strengthens incumbents may improve the business case for continued investment, but it could also make it harder for new entrants to gain traction. The result may be a more profitable UPI ecosystem, but one that is even more firmly anchored by its largest players.