UPI's 10th birthday party

All marketers know that offering something 'free' can act as a customer magnet. This has fascinated behavioural economists

“Major turning point in India’s digital payment journey,” said the PM on the 10th birthday of UPI, reported this paper (August 25, 2026). When UPI was launched, no one would have imagined that in just ten years it will become the force that it is today. The Economist (September 8, 2026) spoke about the many favourable factors that helped UPI become a widely celebrated phenomenon in a relatively short period.

 

The first aspect was the sheer simplicity of the app. Unlike a credit or debit card, the merchant needed just a smart phone with an internet connection. It was simple to connect a bank account to the UPI-based app. And you are ready to send or receive money.

 

The second was the launch of the Jio telecom network in the same year. Its aggressive pricing made data charges so low that suddenly millions started moving up from old feature phones to new-age smartphones with internet connections. And cheap smartphone availability helped this migration.

 

The third was the momentous demonetisation announcement on November 8, 2016, just a few months after the rollout of UPI.

 

It was, as they say, a ‘perfect storm’. And UPI got the storm winds behind it to help it take off.

 

What also played a very important role was the decision of the government to ban fees for commercial UPI transactions.

 

Unlike a credit or a debit card where the card issuer charges an MDR (merchant discount rate) to the merchant, UPI was free. The merchant accepting UPI payment did not have to part with any of his revenue to the UPI-issuing platforms or banks.

 

As a result of all these, in August 2026 UPI processed 24.5 billion transactions worth ₹29.82 trillion. Over 550 million users are part of this UPI network and you can count your vegetable vendor, petty shop owner, music tutor and the Sidhi Vinayak Temple hundi in that list. The government of India is actively pushing the fintech sector to scale international linkages of UPI to slash the high remittance fees for the global Indian diaspora.

 

The government has announced that there will be a modest charge for UPI transactions above ₹2,000, starting from 15 October 2026 (Business Standard 16 September 2026). The editorial in this paper has said that “modest charges will enable healthy growth”. Are there going to be any downsides? We will get to that in a bit. But let us dive into why ‘free’ played an important role in the growth and acceptance of UPI.

 

All marketers know that offering something ‘free’ can act as a customer magnet. This has also fascinated behavioural economics academics.

 

Behavioural economist Dan Ariely’s chocolate experiment demonstrated the ‘zero price effect,’ showing that humans react with irrational excitement when something is offered completely for free. In one experiment researchers offered people a choice between a high-quality Lindt truffle for 15 cents and a lower-quality Hershey’s Kiss for 1 cent. It was found that 73 per cent of the participants chose the premium Lindt truffle while only 27 per cent picked Hershey’s Kiss, after doing a mental cost-benefit analysis. What happens when the price is lowered? In the next experiment they decided to offer both choices at 1 cent less: Lindt at 14 cents and Hershey’s Kiss for free.

 

Logic would have said that the numbers will not change since the gap is still 14 cents. But in reality the results reversed. It was now Hershey’s Kiss that got 69 per cent participants picking it vs Lindt at 31 per cent.

 

Researchers concluded that zero or free has an emotional hot button that makes us behave irrationally.

 

This experiment has been repeated multiple times in different settings and free always wins.

 

Will UPI get a huge headwind if it comes with a merchant charge/an MDR?

 

What has been proposed is that UPI will be free (with the government picking up the tab) for all small transactions but will attract a merchant fee when the transactions are of a higher value for a registered big merchant.

 

From the data we know that in August the number of daily transactions on UPI was 791 million and the value was ₹96,205 crore. That works out to an average of just ₹1,217. Hopefully most of the transactions on UPI will escape the charge. As Rajiv Agarwal of Innoviti Technologies, which works on payment solutions, told me, most big value purchases like home appliances or televisions or mobile phones are rarely paid through UPI.

 

Consumers know that by using a credit card they get an automatic ‘cash back’, a credit period of up to one month and may be EMI if required (though EMI is also available on UPI- linked transactions) .

 

While all this is true, when something that is ‘free’ becomes a paid-for service, it will attract some push- back. And I should add that there have been exceptions to this, with Jio being a shining example of a very smooth transition from free to paid. But that aside, it will be necessary for UPI and the National Payments Corporation of India (NPCI), which runs UPI, to do a massive outreach to ensure that UPI does not get seen as a ‘paid-for service’. It is commendable that NPCI is actively looking for merchants who are today avoiding UPI — I suppose to nudge them to adopt UPI (when I shared on X a poster I had seen at a restaurant saying ‘No Digital Payments Accepted’, I got a message from NPCI/UPI asking me for the name of the restaurant).

 

Hopefully the paid version of UPI will not end up with more merchants putting up a ‘not accepted here’ sign.

 

 

Ambi Parameswaran is a best-selling author and independent brand strategist. His latest is the 10th anniversary special edition of Nawabs Nudes Noodles