By 2025, how much lower is the cost of remittances and merchant payments compared to 2015, and how has this massive cost reduction affected the liquidity and profitability of small businesses?

The cost of both merchant payments (domestic) and remittances (international) has been dramatically reduced between 2015 and 2025, primarily due to India’s pioneering efforts in building Digital Public Infrastructure (DPI).

This massive cost reduction has had a profoundly positive impact on the liquidity and profitability of small businesses by formalizing payments and integrating them into the digital economy.

1. Reduction in Cost of Merchant Payments (Domestic)

The cost of domestic merchant payments has fallen to near-zero, driven entirely by the Unified Payments Interface (UPI).

• Mechanism: Prior to 2016, accepting digital payments required merchants to pay a Merchant Discount Rate (MDR) to the bank for card transactions. The introduction of UPI, with government policy support for zero MDR on most small-value transactions, created a completely new, cost-free payment layer for merchants.

• Result: By 2025, UPI is used for low-value, high-frequency payments across India, from major retailers to street vendors. This has effectively created a cost-free digital settlement mechanism for the vast majority of small business transactions.

2. Reduction in Cost of Remittances (Cross-Border)

The cost of sending and receiving remittances to India has also decreased significantly, though the challenge remains in the bank-dominated corridors.

• Global Average Cost (SDG Target): The Sustainable Development Goal (SDG) Target 10.c aims to reduce the global average cost of remittances to below 3%.

• India's Corridor Costs: While India receives the largest share of global remittances (over $100 billion), the cost has been consistently declining due to increased competition, particularly from FinTech companies and digital transfers.

  • 2015 Cost: Costs averaged around $\mathbf{5\%} \text{ to } \mathbf{7\%}$ for bank transfers.

  • 2025 Cost: The average cost to send money to South Asia (India's region) has fallen to approximately 4.5% to 4.6% in 2025, with digital channels and money transfer operators being the cheapest.

• Future Policy: India is actively promoting the globalization of UPI (e.g., UPI linkages with Singapore's PayNow, France) to bring the near-zero domestic transaction cost model to cross-border remittances, aiming to eventually meet and beat the 3% SDG target.

3. Impact on Liquidity and Profitability of Small Businesses

The cost reduction, particularly in domestic merchant payments, has fundamentally altered the financial health of small businesses and Micro, Small, and Medium Enterprises (MSMEs).

A. Improved Profitability

The switch from cash/high-MDR cards to UPI has a direct, positive impact on the bottom line.

• Direct Cost Savings: By eliminating the 1.5% - 2.5% MDR fee that would have been paid on card transactions, small businesses retain a higher percentage of their revenue. For a merchant whose profit margin is only 5-10%, this saving is crucial.

• Faster Turnaround: The instantaneous nature of UPI means funds are settled T+0 (immediately into the bank account), compared to traditional credit card settlements which could take T+1 or T+2 days. This eliminates the need for expensive short-term working capital or bank overdrafts to manage the lag in funds, boosting profitability.

B. Enhanced Liquidity and Credit Access

The formalization of payments translates into better access to finance, the most critical issue for small businesses.

• Improved Cash Flow: Instant settlement (T+0) via UPI eliminates the reliance on daily physical cash collection and counting, and the risk of cash pilferage. This dramatically improves the reliability and speed of daily cash flow (liquidity).

• Credit Formalization: Every UPI transaction leaves a digital trail. This formal, verifiable transaction history is now being used by FinTech companies and banks to assess the creditworthiness of small merchants who previously operated entirely in cash (and thus had no formal borrowing history).

• New Credit Models: Platforms use UPI data to offer quick, collateral-free loans (e.g., under the Open Credit Enablement Network - OCEN framework), providing liquidity exactly when the small business needs it, thereby empowering them to manage inventory and sudden demand spikes.

In summary, the cost of merchant payments has been virtually eliminated for the majority of small transactions, while remittance costs have been significantly reduced. This massive shift, primarily led by UPI, has been a boon for small businesses, transforming them from cash-dependent entities into digitally-empowered units with improved profitability, predictable liquidity, and better access to formal credit.