India's decision to introduce a merchant fee on higher-value UPI transactions is likely to reshape the economics of digital payments in ways that favour the biggest incumbents, rather than the challengers trying to catch them. According to Bernstein estimates, PhonePe and Google Pay could collectively earn about $900 million annually by March 2028 under the new regime, underscoring how a policy designed to monetise the payments ecosystem may end up reinforcing the scale advantages of the market leaders.
The fee structure, which applies a 0.4% charge on merchant transactions above Rs 2,000, marks a notable shift in a system that has long been defined by low-cost, near-frictionless transfers. UPI has become the backbone of India's retail digital payments boom, but the absence of meaningful merchant monetisation has also limited direct revenue opportunities for payment apps. The new framework changes that equation, creating a revenue pool that will likely be captured disproportionately by the platforms with the widest merchant networks, the strongest consumer habits and the deepest distribution.
Scale Wins Again
PhonePe and Google Pay already dominate India's UPI landscape, and the new fee regime appears likely to entrench that position. Bernstein's projection suggests that the largest platforms will be best placed to monetise the shift because they process the greatest volume of merchant transactions and have the broadest reach across urban and semi-urban India. In a market where user behaviour is sticky and merchant acceptance is critical, scale is not just an advantage; it is the operating model.
The implication is significant for competition. Smaller payment apps, which have struggled to match the brand recognition and transaction density of the two leaders, may find it harder to compete on low-value, high-frequency payments alone. Instead, they may be pushed toward higher-ticket merchant flows, where the new fee can generate more meaningful economics. That could narrow the strategic gap, but it could also force weaker players into a more difficult race for merchant relationships and transaction quality.
The policy may also change how payment companies think about growth. For years, the UPI market was largely a volume game, with firms competing to acquire users and merchants at minimal direct revenue. Now, the ability to monetise larger transactions could encourage platforms to prioritise merchant categories with higher average ticket sizes, better margins and stronger repeat usage. That shift could alter product design, sales strategy and partner incentives across the sector.
Rural Push, New Economics
Bernstein's analysis also points to a second-order effect: the fee regime could encourage payment apps to expand more aggressively into rural India. That may sound counterintuitive at first, but the logic is straightforward. As platforms look to widen the pool of monetisable transactions, they will have an incentive to deepen merchant acceptance beyond the major metros and into smaller towns and villages, where digital payments adoption is still rising.
Rural expansion would not only broaden transaction volumes but also help payment apps build more durable ecosystems around merchants, consumers and local commerce. For the largest players, this is a natural extension of their existing distribution power. For smaller rivals, however, it could be a costly challenge. They may need to invest more heavily in merchant acquisition, incentives and field operations just to remain relevant in a market where the economics are now tilting toward scale.
The broader policy question is whether the new fee regime will support innovation and competition or simply formalise a winner-takes-most structure. UPI has been celebrated globally as a public digital infrastructure success story, but its next phase is likely to be shaped by commercial incentives. If the biggest apps can monetise merchant flows while also expanding into underpenetrated regions, their lead may become even harder to dislodge.
Winners, Losers, Next Moves
For consumers, the immediate impact may be limited, since the fee applies to merchant transactions and not to the basic peer-to-peer habits that have made UPI ubiquitous. But for the industry, the stakes are much higher. A payments market that once rewarded scale through user acquisition alone is now moving toward a model where transaction value, merchant mix and geographic reach matter more than ever.
That shift could benefit the ecosystem if it drives better merchant coverage and more sustainable business models. It could also intensify consolidation if smaller apps cannot build enough high-value flow to justify their costs. In that sense, the new regime does not merely add a fee; it redraws the competitive map.
The central takeaway is that India's UPI economy is entering a new phase. The largest players are positioned to capture the biggest gains, and the policy change may deepen the divide between dominant incumbents and the rest of the field. In a market built on scale, the latest reform appears likely to make the big even bigger.