ICICI Bank has become the first major bank to charge payment aggregators for Unified Payments Interface (UPI) transactions, ending years of free access to the digital payments infrastructure.

The private sector bank is now levying a charge of 4-5 basis points (or 4-5 paisa) on payment aggregators, who use its UPI acquiring service, according to multiple industry sources familiar with the development.

The move comes as banks increasingly question the sustainability of providing free digital payment services while bearing significant infrastructure costs.

"ICICI has become the first bank to monetize this and they are charging 4 basis points to payment aggregators," said a source aware of the development, who spoke on condition of anonymity. "Payment aggregators take UPI acquiring services from most top banks so that the success rate is better. Let’s say, if Axis Bank is down, they can route the UPI transaction to some other bank."

ICICI Bank, in a communication to a payment aggregator, outlined a new fee structure for its UPI merchant acquiring services, set to take effect from August 1, 2025. The document, reviewed by The Head and Tale, stated:

‘This revision have been carefully considered in light of the increasing costs related to technology, transaction processing and other operational factors driven by evaluating economic dynamics…

The charges for UPI P2M transaction handling fee is 0.04% or 0.25 paise whichever is higher, subject to maximum Rs 10 per transaction.

The fee would be billed in the subsequent month and debited from the current account.’

The development marks a significant shift in India's digital payments ecosystem, where the government has maintained a zero MDR policy to encourage adoption of UPI transactions. Under this framework, merchants are not supposed to be charged directly or indirectly for UPI payments, with the government providing subsidies to offset banks' operational costs.

However, the reality on the ground tells a different story. The Head and Tale’s deep dive into the UPI ecosystem revealed a web of hidden costs, skewed incentives, and growing friction among payment players. Despite regulatory bans, payment aggregators have routinely charged merchants UPI transaction fees – often disguised as ‘platform fees,’ ‘convenience charges,’ ‘technical fees,’ or embedded within bundled pricing structures. [We have made this Free to Read today.]

The burden falls hardest on small merchants, who lack the bargaining power to negotiate better terms. Meanwhile, large merchants – better informed about regulations – secure favourable deals, effectively making UPI "free" only for them.

To reduce friction for small merchants using platforms like Shopify, a new model emerged. Shopify would integrate with multiple PAs on the backend and present merchants with a menu of options – each with different pricing. Most merchants, unaware of the nuances, simply chose the cheapest payment gateway without fully understanding the cost implications.

“Over time, these transaction charges began to be passed on to end customers under labels like "delivery charge" or "convenience fee." UPI now powers around 95% of all retail digital payments – and even 100% in most of these merchant setups. In many cases, the effective charge being passed through can go as high as 2.5%, far exceeding what one might expect from a “free” payment infrastructure,” a co-founder at a leading payment aggregator explained.

“The government does not notice or may be does not care. Customers are unaware of the details are not complaining. Small merchant doesn’t know and doesn't have a voice…so, this has been going through.” he added.

“Banks in few meetings did raise this point that the zero-MDR policy is not properly implemented. But they also did not raise their concern much.”

The move by ICICI reflects growing frustration among banks about the economic model of UPI payments. While payment aggregators have built profitable businesses by charging merchants for services that were supposed to be free, banks have continued to invest heavily in server capacity and infrastructure without adequate compensation.

"The bank which invested in server capacity and kept on investing on capex and the payment aggregators went on to benefit from it. That's the imbalance angle," the co-founder believed. "Banks are saying we are not making anything. The subsidy is getting lesser. So, we are going to find a way to charge."

If industry sources are to be believed then Axis Bank is expected to follow ICICI's lead soon, with other major lenders likely to implement similar charges in the coming months.

The current situation stems from what industry insiders describe as a regulatory loophole. While the Finance Ministry's directive clearly states that no one can charge merchants directly or indirectly for UPI transactions, the practical implementation has allowed various intermediaries to find workarounds.

Interestingly, not just payment aggregators, ICICI has decided to charge some large merchants – who use the bank’s UPI directly. “ICICI has told everyone that they will start charging,” a top official at another leading payment aggregator informed.

“The problem will be for some very large merchants (like Reliance) – which the banks will deal with and we as PAs will also have to deal with. It is yet to play out,” the official said.

However, an ICICI spokesperson said that the bank is not levying any charge on any merchant.

Multiple fee structures

“ICICI came to us first informally that they will start charging money. Earlier we could manage to push them back. But now they have come back formally and said that we'll have to charge because they spend lot of money on the infrastructure management, infrastructure cost and they are not able to sustain without charging. Now, they are taking a firm stand that they don't have choice but to charge to payment aggregators,” a top executive at another payment aggregator informed.

Sources told The Head and Tale that ICICI has introduced multiple fee structures, including maintenance charges for inactive accounts, per-transaction fees. "They are pitching it as platform charges – which is like the cost of using our platform, reconciliation service."

“It all depends on the relationship, on the volume you process, how many merchants you have etc. It also depends on whether you have an Escrow account with the bank or not. So, it depends on multiple factors,” the payment aggregator executive added.

“If you have an escrow with the bank, they might not charge you because of a good float – so each bank will take a different view,” the co-founder of a leading payment aggregator mentioned earlier in the story said.

What next?

The move by ICICI is expected to lead to PAs redirecting transaction volumes to banks that haven't yet implemented charges.

"It's a low charge now but they can eventually increase it also. We will currently absorb the cost. And, since all banks have not started charging, so we will route volumes to the banks who are not charging," said the top official at one of the leading payment aggregators.

Having said that, some industry players view the development positively, arguing it could improve service quality and accountability.

“I want them to charge so that I can hold them accountable," the payment aggregator official added. "Currently, if today we ask banks certain things on UPI, they say we are not earning money on this, why should we invest? The banks don’t even pick up our calls on UPI related issues.”

In-fact, Rajesh Londhe, co-founder of Pune-based payment aggregator Phi Commerce, who works with large enterprise merchants, said, “We saw this coming at some point, so we started working on building our own UPI switch last year. We have our own UPI switch to reduce dependence on bank infrastructure. The intention was to build our own technology platform and start routing the transactions to our own switch.”

Phi Commerce plans to offer this switch as a service to other payment aggregators at a fraction of the cost banks are beginning to charge.

The emergence of bank charges raises fundamental questions about the government's zero MDR policy and its long-term viability. With 95% of retail transactions now happening on UPI, the economic pressures on all participants in the ecosystem have intensified.

Industry sources suggest that even the Reserve Bank of India acknowledges the unsustainability of the zero MDR model, but unless the government doesn't allow, nothing can be done. Few days back, RBI governor Sanjay Malhotra indicated that UPI may not remain free for users indefinitely.

The real test will come when multiple major banks implement similar charges simultaneously, potentially forcing payment aggregators to either absorb significant costs or pass them on to merchants more transparently.

"Zero MDR has been a genie which has been hard to put back into the bottle," the payment aggregator official concluded.

*The story has been updated with a comment from ICICI.