India’s Unified Payments Interface (UPI) is no longer entirely free; a small transaction fee kicks in on UPI from October 15. This means that if you pay a shop via UPI for any amount more than Rs 2,000, the vendor or the shop will be charged 0.4% of that transaction, which is capped at Rs 300 for large payments. 

As of now, we are told that the consumers pay nothing. Further, person-to-person transfers are said to be free of charge. Small merchants under a monthly cut-off also are said to stay exempt.

The entire conversation is now hinged on whether the shopkeeper will absorb the 0.4%, or will they add it to the consumer's bill? Will the exemption line always hold? Will the country's most-used payment app platforms like Paytm, PhonePe, and Google Pay make money off this rule?

These are reasonable questions. But by arguing only about who absorbs the 0.4%, we miss the bigger debate: who gets to charge for a piece of public payment infrastructure, who decided that, and what safeguards exist around that decision.

The economic model that is not entirely what it says it is

Let us begin by picturing a matchmaking app, a mall, or a card network — basically any business that has two different actors, say buyers and sellers. These actors can charge each side differently for a transaction. This concept has come from economists Jean-Charles Rochet and Jean Tirole (Tirole won the Nobel Prize partly for this work). 

Card networks provide a simple example. Visa and Mastercard charge merchants a fee, while at the very same time, handing consumers cashback and reward points. The reason is simple: if customers want to use their cards, merchants have a strong reason to accept them too.

The same language is now being used to describe UPI's merchant fee. Here, merchants cannot walk away, and consumers are, at least as of now, said to be on the sweet free ride. 

But there is more to the story. 

The economic literature on such platforms does not suggest that they should simply be free to charge whatever they want. When merchants cannot easily refuse a payment method because customers demand it, the platform has an incentive to charge them more than would be desirable.

That finding became policy. 

In 2015, the European Union capped card interchange fees at 0.2% for debit cards and 0.3% for credit cards, to stop platforms from over-charging. The United States capped debit-card fees after 2010 through the Durbin Amendment. Australia spent two decades leaning on its card networks to bring interchange down. 

The broader lesson is straightforward: when a payment platform becomes difficult for one side of the market to avoid, governments have often stepped in to regulate what it can charge.

Should UPI even charge?

There is an instinct to call UPI a "public good," and therefore something that should never be charged for. In economics, a fully true public good is something that is both non-rival (your use of the good doesn't stop others from using it too) and also non-excludable (there's no........

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