Small merchants built UPI's reach. Here's what government data shows

Small merchants have driven UPI's mass adoption. Here's why defining who qualifies as a small merchant matters as the government creates a framework for potential MDR

Unified Payments Interface (UPI) has become the main engine of India's retail digital economy, accounting for about 85 per cent of India's digital payment transaction volume.

 

At the heart of that expansion are small merchants: the kirana store owners, street vendors, tea stalls, hawkers and neighbourhood service providers. A government-commissioned study released in February shows how deeply digital payments have penetrated this segment, with 94 per cent of small merchants surveyed reporting that they had adopted UPI.

 

The finding takes on added significance as the government creates a legal framework that could eventually allow charges on some electronic payment transactions. While the government has said small businesses and everyday users will remain protected, it has yet to formally define the small merchant category. Here's why small merchants matter to the UPI network.

 

Small merchants have embraced UPI

 

The Department of Financial Services (DFS), Ministry of Finance, released its Socio-Economic Impact Analysis of the Incentive Scheme for Promotion of RuPay Debit Card and low-value BHIM-UPI (Person-to-Merchant) transactions in February this year. The study found that digital acceptance had reached near universality among the merchants surveyed, with 94 per cent of small merchants reporting UPI adoption.

 

The study, carried out in consultation with the National Payments Corporation of India (NPCI), covered 10,378 respondents across 15 states. This included 6,167 users, 2,199 merchants and 2,012 service providers. The analysis evaluates the effectiveness of the government's incentive scheme, introduced in FY 2021-22 and continued through FY 2024-25, in promoting digital payments, strengthening payment infrastructure and advancing financial inclusion across the country.

 

According to the study, the benefits were not limited to the ability to accept payments. About 72 per cent of merchants surveyed expressed satisfaction with digital payments, citing faster transactions, improved record-keeping and operational convenience. Another 57 per cent reported an increase in sales following digital adoption. The increase in sales, however, cannot be attributed to UPI alone. The study also highlights the role played by incentives in bringing merchants into the digital payments ecosystem.

 

According to the study, incentives helped reduce cost barriers for merchants and acquiring banks, accelerated merchant onboarding and helped build trust in digital payment systems across income groups and geographies. The government study credits the combined efforts of the government, NPCI, banks, fintech companies and payment service providers with strengthening the digital payments ecosystem.

 

The infrastructure behind the merchant boom

 

The expansion in merchant adoption has been accompanied by a rapid increase in the physical and digital infrastructure supporting UPI.

 

During the implementation period of the incentive scheme, digital transactions increased nearly 11 times, while UPI's share of total digital transactions surged to about 80 per cent, establishing it as the primary payment rail. UPI QR deployments rose from 93 million to about 658 million. The number of banks operating on the UPI platform increased to 661 by March 2025 from 216 in March 2021. At the same time, third-party app providers increased to 38 from 16, strengthening competition in the ecosystem and giving consumers and merchants more options to access UPI.

 

The broader UPI infrastructure has helped make this expansion possible. The system is built on digital public infrastructure anchored by open application programming interfaces, universal interoperability and large-scale participation by banks. Person-to-Merchant (P2M) payments have increasingly become an important part of this expansion, with QR-code adoption among small businesses helping drive the shift towards digital payments for everyday purchases.

 

The study's findings are further supported by other official data. A report titled “India's Digital Payments Revolution: UPI's Global Impact”, published by NPCI and Boston Consulting Group (BCG) last year, estimated that soundboxes and interoperable QR codes had helped bring 65 million to 70 million merchants onto digital payments, primarily small roadside vendors, tea stalls and neighbourhood kirana stores.

 

The number of QR codes in circulation is much higher. Official estimates put active QR deployments at more than 700 million to 790 million. Since individual merchants can have multiple QR stickers from competing applications such as PhonePe, Paytm and Google Pay at the same counter, the proliferation of QR codes has further deepened UPI adoption.

 

Why small merchants cannot be ignored

 

This extensive merchant adoption matters because of the government's recent changes to the legal framework governing electronic payments.

 

Parliament passed the Taxation and Other Laws (Amendment) Bill, 2026, which, among other tax changes, amends the legal framework governing electronic payments in a manner that could pave the way for charges on UPI transactions in the future. This creates an enabling legal framework to reintroduce the Merchant Discount Rate (MDR) on digital payments such as UPI.

 

MDR is the fee paid by a merchant to the bank or payment provider when a customer makes a digital payment. It is currently zero for UPI. For other payment modes such as cards and net banking, MDR can range from about 0.25 per cent to 4.5 per cent of the transaction amount. The fee is typically divided among participants in the payment ecosystem, including the payment processor, bank and card network. The legislation creates the enabling framework; it does not itself set an active MDR or establish the final categories of exempt merchants. Actual rates, exemptions and precise turnover or transaction thresholds are to be decided subsequently.

 

While Finance Minister Nirmala Sitharaman has said small vendors such as tea sellers, street cart and vegetable vendors, and small shopkeepers would be excluded from any future MDR, the government has not yet formally notified the precise legal definition, turnover threshold or other criteria that would determine which merchants qualify for the exemption.

 

Consumers, too, are expected to remain outside any charge. The finance minister has explicitly said consumers will pay zero, while the proposed framework would potentially apply to a limited category of merchant transactions.

 

The government's own study makes clear that small merchants are not peripheral users of UPI. They are among the biggest beneficiaries of, and contributors to, its mass adoption. Therefore, it is important to define the merchants that drive the sheer volume of UPI transactions and matter most to the network.