On September 15, the National Payments Corporation of India, the bank-owned body that runs UPI, notified a fee on UPI payments to shops. The merchant discount rate (MDR) begins on October 15, the first charge of any kind on the system that has been free since 2020.

Most of the argument since has been about whether shoppers end up paying, which will not be settled for a year. A simpler question that can be answered now is who collects this fee?

Take a Rs 3,000 payment at a large retailer. The fee is 0.4%, so Rs 12 leaves the shop's account and is divided among four parties under the structure announced alongside the rate.

The customer's own bank, which debits the account, takes 40%. The official case for giving it the largest share is that it holds the customer's account, checks the UPI PIN, screens each payment for fraud and deals with complaints and refunds.

The firm that signed the shop up to accept UPI takes 30%. The app the customer paid with, PhonePe or Google Pay or another, takes 20%. The bank that sits behind that app and connects it to the system takes the last 10%.

Not every payment reaches that point, though. Nothing is charged below Rs 2,000, money sent between people is free at any amount, and a small shop that receives less than Rs 1 lakh a month through UPI pays nothing, even on a Rs 5,000 sale.

For everyone else, the fee is capped at Rs 300, which is what a Rs 75,000 payment costs – so a Rs 2 lakh payment also costs the shop Rs 300. Payments made by standing instruction, the UPI AutoPay mandates behind monthly subscriptions, SIPs and bills, carry no fee at any amount.

That lets a shop with regular customers, a gym or a coaching class, say, move them onto monthly mandates and stay outside the fee altogether. Railways, telecom, insurance and fuel pay a flat Rs 5 on each payment above Rs 2,000, whatever its size; mutual funds and share broking pay 0.02%, a twentieth of the standard rate.

Add the exclusions together, and the headline rate describes very little.

Bernstein, a research firm, estimates that once these exemptions are counted, shops will pay about 0.19% on all the money they receive through UPI, less than half the advertised 0.4.

That is because only about half of that money will pay the full rate. The rest comes in payments under Rs 2,000, at small shops, by standing instruction or in the flat-fee categories, and pays nothing or close to nothing. Half of 0.4 is roughly 0.2. What follows is about that smaller sum, and about who ends up holding it.

For someone paying by UPI, the screen will look the same and show no charge. The difference is that each payment of more than Rs 2,000 to a larger shop now costs that shop money. Most of it goes to banks rather than to the app the customer used, and over time it can find its way into prices.

How The Bank Gets The Most

Two of the four shares, the 40% for the customer's bank and the 10% for the bank behind the app, can only go to a bank. So the rule itself hands banks half of every fee.

The open question is the shop's 30%. A shop can be signed up by a bank or by a payment firm such as Razorpay or Cashfree, and whichever does it takes that share.

Depending on how the 30% is divided, banks end up with 60 to 70% of the total and the payment firms with about 15%. Banks and apps also have private revenue-sharing deals that are not disclosed, so the exact final split cannot be seen from outside.

Brokerages put the annual pool at Rs 15,000 crore to Rs 20,600 crore.

JPMorgan puts about Rs 11,700 crore with the customer's bank and the shop's, equal to 2.1% of what India's listed banks earned last year, and a further Rs 1,700 crore with the banks behind the apps. Because the fee starts in mid-October, most of it will show in the year to March 2028 rather than this one.

For shops, the change that matters beyond the fee itself is the Rs 1 lakh line. A small shop that takes in more than Rs 1 lakh a month through UPI for three months running is moved into the paying category, and from then on every sale above Rs 2,000 carries the fee.

UPI remains the cheapest way for a shop to take a digital payment, since debit card fees run up to 0.9% and credit cards 1.5 to 2.5%. But in a LocalCircles survey, 41% of merchants said they would not bear any fee at all, which points to more cash, or a quiet surcharge, on large bills.

Does The Least, Earns The Most

Checking a balance and debiting an account takes under a second and no human being. That is the whole of what the customer's bank does, and it earns the largest single share.

This copies how cards work. On a card, the biggest slice goes to the bank that issued it, because that bank is lending money and risking not being repaid. On UPI, nothing is lent, and the money leaves at once. The 40% pays a bank for owning the customer. It does not pay for work done.

It also settles a long argument. Banks paid to build much of the plumbing and watched apps take the customer. Apps built what the customer sees and watched banks keep the account. The split decides it in the banks' favour.

The Wrong Number

NPCI's defence is that payments up to Rs 2,000 are more than 95% of all shop payments and are untouched. That is true, but it counts the wrong thing, because counting transactions is not counting money.

In August, payments above Rs 2,000 were 67% of the value handed over to shops while being 4% of the transactions.

Volume-wise, nearly all the payments are exempt. By value, most of the money is not.

Which Banks Gain

On the customer's side, the winners are the banks with the most account holders.

That share of the fee is worth about Rs 8,000 crore a year, of which State Bank of India should take roughly a quarter, with Bank of Baroda and HDFC Bank at around Rs 800 crore each.

The app's side is far more concentrated. Yes Bank reports handling 58.7% of shop collections in the quarter to June and 36%of payments on the customer side, and Axis Bank discloses about 38% on the customer side. Three banks, one of them not large, handle nearly all of it.

Citi estimates the effect on Yes Bank's profit before tax at 6 to 12%, against 1 to 2% for Axis and State Bank and under 1% for HDFC Bank and ICICI Bank. These are full-year figures published the day after the announcement, before any money had changed hands.

Treat those shares carefully, for the same reason the 96% figure misleads. Banks report them by transaction count, and shop collections are mostly small sums. A bank leading on transactions can earn far less than its share suggests.

So the biggest cheque and the biggest effect go to different banks, but neither is equally secure. Nobody moves a salary account over a few paise on a grocery bill, so the customer-side share is safe. The app-side share is a commercial arrangement, and the apps hold the volume.

What The Shopper Sees

Nothing, which is the point. NPCI has told apps and payment firms not to charge the fee onto customers. Apps may not add a platform fee or any other charge of their own to a UPI payment, so no line item appears at the till.

India has tested that kind of ban before.

The Reserve Bank's 2017 order stops shops from adding debit card charges, and on credit cards it has issued no instruction at all. The 2% that jewellers and travel agents add to card bills breaks the contracts they have signed; it has survived a decade because somebody has to complain about Rs 400.

A ban on showing the charge is not a ban on recovering it. Big chains will bury the cost in their prices, since a surcharge sign damages a brand and 0.4% is too small to notice on any one item. Mid-sized shops will add it at the counter, and they are exactly who the rules catch.

How The Government Got Out

Free UPI was never free. The government funded it, reimbursing banks and payment firms 0.15% on small shop payments, and allocated around Rs 2,000 crore to that.

The fee does not create a cost.

It moves an existing one off the taxpayer and onto the shop and, in time, onto the shop's customer. Getting it off the budget took a change in the law.

Until August, the law itself kept the system free. Section 10A of the Payment and Settlement Systems Act barred banks and payment firms from charging anyone for payments made through the electronic modes listed in the Income-tax Act, and UPI was on that list. Parliament amended it in early August so that the list is set by government notification instead.

Parliament set no rate of its own. It removed the bar and left the number to a steering committee inside NPCI, which the finance ministry described at the time as an enabling provision. Its 22 members include 16 banks and four payment apps, the same firms that collect the fee, and NPCI itself is owned largely by banks.

So the Rs 2,000 threshold, the 0.4%, the Rs 300 ceiling, and the four-way split are all committee decisions rather than law. Raising any of them needs a meeting, and no vote in Parliament.

The shopper pays nothing today and will not see it when they eventually do, which is why the change has passed so quietly. What matters is the next meeting.

A rate that hands a bank 40% for debiting an account was set by a committee those same banks help own, and the only counterweight is a government that has spent the last six years insisting UPI would stay free.