UPI Adoption Soars: Small Merchants Embrace Digital Payments Amid Fee Policy Uncertainty

The Unified Payments Interface (UPI) has become integral to India’s digital retail economy, handling approximately 85% of the nation’s digital payment transactions. Small merchants, including kirana store owners and street vendors, are central to this extensive reach, with 94% adopting UPI.

This widespread adoption comes as the Indian government considers a legal framework that could introduce charges, known as Merchant Discount Rate (MDR), on certain electronic payment transactions. Currently, UPI transactions remain exempt from MDR, though a formal definition for ‘small merchant’—promised protection from these charges—is still pending.

Merchant Satisfaction and Growth

A Department of Financial Services (DFS) study, conducted with the National Payments Corporation of India (NPCI) across 15 states, revealed significant merchant satisfaction. 72% of merchants reported satisfaction with digital payments, citing faster transactions, better record-keeping, and operational convenience. Additionally, 57% noted an increase in sales after adopting digital payment methods.

Government incentive schemes, active since FY 2021-22, have reduced cost barriers and accelerated merchant onboarding, fostering trust in digital payment systems. During this period, digital transactions saw an elevenfold increase, with UPI’s share of total digital transactions surging to about 80%. UPI QR code deployments expanded from 93 million to approximately 658 million, and 661 banks joined the platform by March 2025.

Defining ‘Small Merchant’ Crucial for Policy

The extensive adoption by small merchants underscores the critical need for their formal definition, especially following the recent passage of the Taxation and Other Laws (Amendment) Bill, 2026. This bill establishes the legal basis for reintroducing MDR on digital payments.

Actual rates and specific exemptions for small vendors are yet to be determined, but the Finance Minister confirmed that consumers will not be charged. Small vendors like tea sellers and street hawkers are expected to be excluded from any future MDR.

Government data consistently confirms small merchants as vital contributors to UPI’s mass adoption, making their precise definition essential for the network’s equitable and sustainable future.