Days after the National Payments Corporation of India recommended an interchange fee up to 1.1% on UPI transactions of over Rs 2,000 made through Prepaid Payment Instruments (PPIs), there was confusion over it applicability. There were claims on social media saying that every transaction over Rs 2,000 made via Unified Payments Interface (UPI) will attract a fee of 1.1%, making UPI less preferable option over cash payments.
Responding to such rumours, NCPI issued a statement today, clarifying that the interchange fee will only be applicable for certain specific transactions, and will be not applicable for bank-to-bank transfers done via UPI.
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The statement issued by NCPI said that as 99.9% of UPI transactions at present are made using a linked bank account, only a small portion of payments will attract the fee. The statement said, “Traditionally, the most preferred method of UPI transactions is linking the Bank account in any UPI enabled app for making payments which contributes over 99.9% of total UPI transactions. These Bank account-to-account transactions continue to remain free for Customers and Merchants.”
NCPI further clarified, “Recent regulatory guidelines, the Prepaid Payment Instruments (PPI Wallets) have been permitted to be part of interoperable UPI ecosystem. In view of this NPCI has now permitted the PPl wallets to be part of interoperable UPl ecosystem. The interchange charges introduced are only applicable for the PPl merchant transactions and there is no charge to customers, and it is further clarified that there are no charges for the bank account to bank account based UPI payments (i.e. normal UPI payments).”
The statement added that “with this addition to UPI, the Customers will have the choice of using any bank accounts, RuPay Credit card and prepaid wallets on UPl enabled apps.”
The interchange fee, which will be upto 1.1%, came after NCPI allowed full interoperability of pre-paid instruments with all UPI merchants in offline stores and online apps/websites.
Here is what this new development in India’s digital finance system means.
On which transactions it will be applicable
The new full interoperability means pre-paid instruments like digital wallets can be used to make payments to merchants using UPI, including scanning a QR code at offline stores. Generally, while making UPI payments, the money is directly debited from the linked bank account.
Users can keep money in their digital wallets, which can be used to make certain payments. Now, according to the interoperability guidelines, such wallets can be used to make all UPI payments. And this interchange fee will be applicable only if the wallet is used to make the UPI payment. If the payment is made using the linked bank account, there will be no charge.
As NCPI has said that at present 99.9% of payments are made using linked bank accounts, this means 99.9% of current transactions will not be subject to the interchange fee.
At present, while selecting UPI as payment at e-commerce sites or while paying via QR code at merchant stores, payment apps like Paytm directly open the UPI payment from the bank option, and there is no option to pay via wallet. The wallet is shown only if Paytm, PhonePe etc wallets are chosen at the checkout screen on merchant websites, or a non-UPI option is selected in the payment app.
But now after the new guidelines are implemented, wallets will also be available while making UPI payments. This means, while making a payment via UPI using a payment app like Paytm or PhonePe, the app will show options to select from where the payment is to be made, directly from a bank or the wallet of the app. Now, if the user selects the wallet of the app, then the 1.1% fee will be applicable if the transaction size is over ₹2,000. But if the payment is made by directly debiting the bank account, selecting a bank account linked to the account and then entering the MPIN, then no charge will be applicable.
Therefore, unless a user is making a payment from the wallet, there will be no interchange charge. Some of the wallets are Paytm wallet, PhonePe wallet, Amazon Pay, MobiKwik wallet etc. Smart cards, vouchers, and magnetised chips come under prepaid payment instruments, and the fee will apply if these are used to make UPI payments.
The interchange fee will not be applicable for peer-to-peer (P2P) transactions or peer-to-peer-merchant (P2PM) transactions between a bank and the prepaid wallet. This means, sending money to friends, family or any other individual or a small business merchant’s bank account will not attract an interchange fee. Most UPI payments at present fall under these categories.
Who will pay
Even after the fee becomes applicable for a transaction, the customer will not have to pay the interchange fee. Interchange fees are transaction fees that the merchant has to pay whenever a customer processes a transaction. It is similar to Merchant Discount Rate (MDR) that merchants have to pay while receiving payments using credit and debit cards.
Therefore, the new rule basically means, if a customer pays at a store using UPI by scanning a QR code and selecting wallet for the payment, then the merchant will have to pay the fee to the payment service provider like Paytm or PhonePe. The user does not have to pay the fee.
If the user pays directly from the linked bank account, the question of the fee does not arise.
Moreover, all merchants will not be liable to pay the fee even if the payment is made from PPIs. Small businesses which have a projected monthly inward UPI transaction of Rs 50,000 or less will not be required to pay. The fee will vary from 0.5% to 1.1% based on the merchant category code as per NCPI. Reportedly, 0.5% fee will be levied for categories like fuel, education, agriculture, and utility payments. Categories such as convenience stores, and speciality retail outlets will have an interchange fee of 1.1%, provided the transaction size is ₹2,000 or above.
As a result, most small stores and roadside stalls that use UPI to accept payment will not be impacted, as most of their sale sizes are below ₹2,000. For medium-category merchants, it will impact a portion of the transactions. For high-end stores, it will be applicable on all transactions as almost all sales in such stores are high value, way above ₹2,000.
Benefit to payment service providers
This new system will provide a much-needed revenue option for payment service providers like Paytm, PhonePe, Amazon Pay etc, for UPI transactions made using the wallets of these services. The service providers are struggling due to a lack of transaction fee on UPI payments, given that UPI has become the main mode of digital payment in India.
Analysts have already predicted additional revenue for companies like Paytm due to the interchange charge. Paytm yesterday released a statement saying that Paytm Wallet will be universally acceptable on all UPI QRs and online merchants, and Paytm Payments Bank will earn additional interchange revenue from merchants acquired by other payment service providers (PSP), payment gateways (PG) and payment aggregators (PA).
“From now on, the Bank will earn 1.1% interchange revenue when our wallet customers (i.e., the KYC wallets issued by our associate Bank) make payments on merchants acquired by other payment aggregators or banks,” Paytm said.
While payment service providers will earn the fee, they will be required to pay 15 basis points as a wallet-loading service charge to the remitter bank for recharging a wallet with over Rs 2,000. This means, if a user loads a Paytm wallet with ₹2,000 or more, Paytm will pay 0.15% of the amount as wallet loading charge to the user’s bank.
While the customers do not have to pay the interchange fee and the wallet loading fee, the merchants or the wallet companies may choose to pass on the charge to the customers.
