India’s Unified Payments Interface (UPI) has transformed the country’s digital payments ecosystem, but its expansion into merchant transactions is showing signs of stagnation. According to National Payments Corporation of India (NPCI) data, person-to-merchant (P2M) payments accounted for approximately 63% of all UPI transactions in October 2026, barely changing from 62% in October 2024. The slowdown comes despite record transaction volumes during the festive season and growing adoption of digital payments across the country.
The underlying problem is the economics of acquiring and maintaining merchants. The number of unique merchants accepting UPI has remained largely unchanged at around 6 crore over the past two years, according to industry executives cited by Moneycontrol. Payment companies and banks say the absence of a merchant discount rate (MDR), delays in government incentives and the end of certain infrastructure subsidies have weakened the financial incentive to expand acceptance networks, particularly among small businesses.
UPI Merchant Payments Share Has Barely Increased in Two Years
UPI transactions are broadly divided into two categories: person-to-person (P2P) payments and person-to-merchant (P2M) payments.
P2P transactions involve money transfers between individuals, such as sending money to friends or family members. P2M transactions involve payments made by customers to businesses, including retail shops, restaurants, supermarkets and online merchants.
The share of merchant transactions increased significantly between January 2022 and October 2024. P2M payments accounted for approximately 40% of UPI transactions in January 2022, rising to around 62% by October 2024.
However, the proportion has barely changed since then.
| Period | P2M share of total UPI transactions |
|---|---|
| January 2022 | 40% |
| October 2024 | 62% |
| October 2026 | 63% |
The figures indicate that UPI’s growth is increasingly being driven by existing users conducting more transactions rather than a significant expansion in the number of merchants accepting digital payments.
This distinction matters because increasing merchant acceptance is essential for UPI to become a more comprehensive alternative to cash across India’s retail economy.
Why Merchant Acquisition Has Slowed Down
The number of unique merchants on UPI has remained around 6 crore for approximately two years.
Industry executives attribute this stagnation to three major factors:
- No meaningful merchant discount rate on most bank-account-funded UPI payments.
- Delays in government subsidies intended to support digital payment adoption.
- The end of support through the Reserve Bank of India’s Payments Infrastructure Development Fund.
Acquiring a merchant involves more than installing a QR code. Payment companies must invest in sales teams, merchant onboarding, technology, customer support, devices and ongoing servicing.
These costs can be difficult to recover when merchants process relatively small transactions and payment providers do not earn a transaction-based fee.
A senior banking executive quoted by Moneycontrol argued that without subsidies and MDR revenue, payment companies have little financial incentive to expand their merchant networks.
The result is that companies are increasingly focusing on monetising existing merchants instead of adding entirely new businesses to the UPI ecosystem.
What Is MDR and Why Does It Matter for UPI?
Merchant discount rate, or MDR, is a fee paid by merchants for accepting and processing digital payments.
For example, when a customer pays a merchant using a credit card, the merchant generally pays a processing fee. That amount is distributed among the payment ecosystem participants, including banks and payment service providers.
However, bank-account-funded UPI payments have largely operated under a zero-MDR framework.
The government removed MDR on UPI transactions in 2020 to encourage digital payment adoption and reduce the cost of accepting electronic payments.
The policy helped accelerate UPI adoption, particularly among small businesses that might otherwise have preferred cash because of payment-processing costs.
However, the zero-MDR structure also created a financial challenge for payment companies. They have to maintain the infrastructure supporting millions of merchant transactions without receiving a conventional transaction fee for most bank-account-funded payments.
The economics become particularly difficult when acquiring small merchants who generate limited transaction volumes.
For payment companies, the question is no longer simply how to install more QR codes. It is how to make merchant acquisition financially sustainable.
Government Subsidies and RBI Support Have Weakened
The government and RBI previously supported digital payment infrastructure through financial incentives.
One important initiative was the Reserve Bank’s Payments Infrastructure Development Fund (PIDF), introduced to encourage the deployment of digital payment acceptance infrastructure, particularly among small merchants and businesses in underserved regions.
Under the programme, payment companies received financial support for deploying infrastructure such as point-of-sale terminals and other digital payment acceptance facilities.
However, the PIDF support had not been extended through fresh disbursements after December 2025, according to industry executives quoted in the report.
Government incentives for low-value UPI and RuPay debit-card transactions have also faced delays. The Moneycontrol report cited executives saying that promised subsidies had not been paid since March 2025.
These delays have affected the ability of banks and payment companies to recover the costs associated with expanding digital payment acceptance.
The absence of predictable financial support has made it more difficult for payment providers to justify additional spending on merchant acquisition, particularly in smaller towns and rural markets.
MDR Rollout Delayed Until After Diwali 2026
The debate around UPI’s revenue model has gained importance because NPCI has moved towards reintroducing MDR on selected merchant transactions.
The proposed framework, announced in September 2026, was originally scheduled to take effect on October 15. However, NPCI postponed implementation until after Diwali to give merchants and payment companies additional time to prepare.
Under the announced framework, a 0.4% MDR is proposed for eligible bank-account-funded merchant payments above ₹2,000, subject to a maximum charge of ₹300 per transaction.
Smaller transactions and specified exempt merchant categories are expected to remain outside the levy.
| Proposed MDR feature | Details |
|---|---|
| MDR rate | 0.4% |
| Eligible transactions | Selected bank-account-funded P2M payments |
| Transaction threshold | Above ₹2,000 |
| Maximum fee | ₹300 per transaction |
| Smaller transactions | Expected to remain exempt |
| Original implementation date | October 15, 2026 |
| Revised timing | After Diwali 2026 |
The exact revised implementation date had not been announced as of November 6, 2026.
The proposed charge represents a significant change from the zero-MDR model that has supported UPI adoption for several years.
Importantly, the framework does not mean every UPI payment will become chargeable. More than 95% of merchant transactions by volume are expected to remain free under the proposed structure, according to industry estimates reported by The Economic Times.
PhonePe, Paytm and Other Payment Companies Focus on Existing Merchants
With merchant acquisition becoming more expensive, payment companies are increasingly looking for additional revenue opportunities from businesses already accepting UPI.
One example is the expansion of soundboxes.
These devices provide audio confirmation when a merchant receives a digital payment. They help shopkeepers verify transactions without constantly checking their phones.
PhonePe, Paytm and other payment providers have expanded soundbox distribution and merchant subscriptions.
However, soundbox deployment does not necessarily increase the number of unique merchants accepting UPI.
A shop that already accepts QR-based payments and installs a soundbox represents an additional monetisation opportunity for the payment company, but it does not create a new merchant acceptance point.
This distinction explains why payment providers can report growth in merchant-device subscriptions while the overall number of unique merchants remains relatively flat.
The next phase of growth will require more businesses to begin accepting digital payments, rather than simply adding services to existing merchant relationships.
UPI Still Dominates India’s Digital Payments Market
Despite the slowdown in merchant acquisition, UPI remains India’s most important digital payments platform.
NPCI data cited by Moneycontrol indicates that UPI accounted for approximately 89% of digital payment transactions in the country.
Transaction volumes and values have continued to increase, demonstrating that consumers and businesses are using the platform more frequently.
However, the stagnation in P2M share suggests that the growth of digital payments is not translating into an equivalent expansion of merchant acceptance.
The distinction is particularly important for India’s smaller businesses, street vendors and shops in less-connected areas.
Expanding UPI acceptance across these businesses could reduce dependence on cash, improve transaction records and support wider participation in the formal digital economy.
But achieving that expansion requires a sustainable financial model for the companies responsible for building and maintaining the payment infrastructure.
The Bigger Picture
UPI has successfully established itself as India’s dominant digital payments network, but its next phase of expansion faces a different challenge. The priority is no longer simply encouraging consumers to make digital transfers. It is ensuring that more merchants across the country can accept those payments reliably and economically.
The stagnation in merchant numbers highlights the limitations of a system that depends heavily on free transactions and delayed incentives. The proposed MDR framework could create a revenue stream for payment ecosystem participants, but its implementation must balance the financial sustainability of providers with the affordability of digital payments for merchants and consumers.
Looking Ahead
The implementation of the revised MDR framework will be an important development for banks, fintech companies and merchant-payment providers. Industry participants will watch whether transaction-based revenue improves the economics of merchant acquisition and encourages investment in smaller towns, rural markets and underserved business categories.
The longer-term success of UPI will depend on expanding the number of businesses accepting digital payments while maintaining the affordability and convenience that made the platform popular. If payment companies can build sustainable merchant services without discouraging adoption, UPI could enter another phase of growth. Otherwise, transaction volumes may continue increasing largely through existing users and merchants rather than through broader acceptance across India’s retail economy.
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