The Unified Payments Interface (UPI) system has become a key driver of India's retail digital economy, accounting for approximately 85 percent of the total volume of digital payment transactions in the country. Small sellers, including kirana store owners, street vendors, tea sellers, hawkers, and local service providers, are at the core of this growth.
A government-commissioned study published in February demonstrated the deep penetration of digital payments into this segment: 94 percent of surveyed small traders reported using UPI. This finding is particularly significant against the backdrop of the government developing a legal framework that could potentially allow for charges on certain electronic payment operations. Although the government stated that small businesses and ordinary users will remain protected, it has not yet officially defined the category of a small trader.
Small Traders Adopted UPI
The Ministry of Finance, through the Department of Financial Services (DFS), released an Socio-Economic Impact Analysis of the incentive scheme for promoting RuPay debit cards and low-cost BHIM-UPI transactions (person-to-merchant) in February. The study showed that digital acceptance reached near-ubiquitous levels among surveyed traders, with 94 percent of small traders reporting the use of UPI.
This study was conducted in consultation with the National Payments Corporation of India (NPCI) and covered 10,378 respondents across 15 states. Among them were 6,167 users, 2,199 traders, and 2,012 service providers. The analysis assesses the effectiveness of the government incentive scheme, introduced in the financial year 2021-22 and continued until the financial year 2024-25, in promoting digital payments, strengthening payment infrastructure, and fostering financial inclusion nationwide.
According to the study, the benefits were not limited to the ability to accept payments. About 72 percent of surveyed traders expressed satisfaction with digital payments, noting faster transactions, improved record-keeping, and convenience. Another 57 percent reported increased sales after switching to digital methods. However, the study emphasizes that sales growth cannot be attributed solely to UPI. It also notes the role of incentives in attracting traders into the digital payment ecosystem.
The research indicates that incentives helped reduce cost barriers for traders and acquiring banks, accelerated the onboarding process for traders, and promoted trust in digital payment systems across various income groups and geographical regions. The government study attributes the strengthening of the digital payment ecosystem to the joint efforts of the government, NPCI, banks, fintech companies, and payment service providers.
Infrastructure Behind the Trader Boom
The expansion in the number of traders using the system was accompanied by a rapid increase in the physical and digital infrastructure supporting UPI. During the implementation of the incentive scheme, the number of digital transactions increased nearly 11-fold, and UPI's share in the total volume of digital transactions grew to approximately 80 percent, establishing it as the primary payment channel. The number of deployed UPI QR codes rose from 93 million to approximately 658 million.
The number of banks operating on the UPI platform increased to 661 by March 2025, up from 216 banks in March 2021. Concurrently, the number of third-party applications increased from 16 to 38, intensifying competition in the ecosystem and providing consumers and traders with more options for accessing UPI. The broader UPI infrastructure enabled this expansion. The system is built on a digital public infrastructure based on open application programming interfaces, universal interoperability, and large-scale bank participation. Person-to-merchant (P2M) payments are becoming an increasingly important part of this expansion, and the adoption of QR codes among small businesses contributes to the shift towards digital payments for daily purchases.
The study's findings are corroborated by other official data. In a report titled 'India's Digital Payment Revolution: Global Impact of UPI,' published by NPCI and Boston Consulting Group (BCG) last year, it was suggested that sound boxes and compatible QR codes helped bring 65 to 70 million traders onto digital payments, primarily small street vendors, tea sellers, and local kirana stores.
The number of circulating QR codes is significantly higher. Official estimates place the active number of QR code deployments between 700 and 790 million. Since individual traders may have multiple QR stickers from competing applications such as PhonePe, Paytm, and Google Pay at one counter, the proliferation of QR codes has further deepened UPI adoption.
Why Small Traders Cannot Be Ignored
This extensive trader adoption is significant due to recent changes in the government's legal framework governing electronic payments. Parliament passed the Taxation and Other Laws (Amendment) Bill of 2026, which, in addition to other tax changes, alters the legal framework regulating electronic payments in a way that could pave the way for introducing UPI transaction fees in the future. This creates a favorable legal basis for the potential reintroduction of a Merchant Discount Rate (MDR) on digital payments like UPI.
MDR is a fee paid by the merchant to the bank or payment provider when a customer makes a digital payment. Currently, this rate is zero for UPI. For other payment methods, such as cards and internet banking, MDR can range from 0.25 to 4.5 percent of the transaction amount. This fee is typically distributed among participants in the payment ecosystem, including the payment processor, the bank, and the card network. The legislation creates a favorable foundation but does not itself establish an active MDR or final categories of exempted traders. Actual rates, exemptions, and precise turnover or transaction thresholds will be determined later.
Although Finance Minister Nirmala Sitharaman stated that small sellers, such as tea sellers, street carts, and vegetable vendors, as well as small shopkeepers, will be excluded from any future MDR, the government has not yet officially notified the exact legal definition, turnover threshold, or other criteria that will determine which traders are eligible for exemption. Consumers are also expected to remain outside any charges. The Finance Minister explicitly stated that consumers will pay zero, while the proposed structure could potentially apply to a limited category of merchant transactions.
The government's own study clearly shows that small traders are not peripheral users of UPI. They are among the largest beneficiaries and participants in its mass adoption. Therefore, it is crucial to identify the traders who generate a huge volume of UPI transactions and are most vital to the network.