With NPCI levying a 1.1% interchange fee from April 1, consumers feel this could be a blow to India’s nascent but fast growing digital payments industry. Rajneesh De, Consulting Editor, APAC News Network examines…..
The National Payments Corporation of India (NPCI) has notified recently that an interchange fee of up to 1.1 % will be applicable on merchant UPI (Unified Payments Interface) transactions from April 1.
In a recent circular, the NPCI said that using Prepaid Payment Instruments (PPIs) for transactions through UPI will attract an interchange fee. The charges will be levied if the transaction is more than ₹ 2,000.
The interchange fee varies for the different categories of merchants. It ranges from 0.5% to 1.1% and a cap is also applicable in certain categories.
Dissecting the Announcement
UPI is currently the most preferred and the most used payment system in India that allows users to transfer money between bank accounts instantly using their mobile phones. The PPIs, on the other hand, are digital wallets that allow users to store money and make payments.
There are a few popular PPIs in India, including Paytm, PhonePe, and Google Pay. An interchange fee is a fee that is charged by one bank to another bank for processing a transaction. In the case of UPI transactions, the interchange fee is paid by the bank of the merchant (the person or business receiving the payment) to the bank of the payer (the person making the payment).
NPCI clarified that the introduced fee is only applicable for merchant transactions made through prepaid payment instruments. The payments body clarified that no charges will be levied on normal UPI payments which it termed as “bank account- to-bank account based UPI payments.”
For telecom, education, and utilities/post office, the interchange fee is 0.7% while for supermarkets the fee is 0.9% of the transaction value. 1% charges will be levied for insurance, government, mutual funds, and railways, 0.5% for fuel, and 0.7 for agriculture.
Interchange will not be applied in the case of peer-to-peer (P2P) and peer-to-peer-merchant (P2PM) transactions. PPP issuers will be required to pay 15 basis points (bps) to the remitter bank as a wallet-loading charge for transactions of over ₹ 2,000. The pricing will be reviewed by the NPCI on or before September 30, 2023.
What are going to be the likely key takeaways?
- UPI payments made through PPIs — read digital wallets like PayTM wallet — will now attract 1.1 per cent fee if the value of the transaction is Rs 2000 or more.
- The wallet transactions that are worth less than Rs 2000 will not attract this charge.
- The fee will be levied on the merchant side. This means merchants may or may not choose to pass on the extra fee to consumers.
- Regular UPI transactions, the ones that are made directly from bank account to bank account, remain free.
Rajsri Rengan, India Head of Development, Banking and Payments, at FIS sounded upbeat about the development. ”The new interoperability guidelines for prepaid payment instruments announced by the NPCI is a significant step towards building a more inclusive and seamless digital payments ecosystem in India.”
“The interoperability of digital wallets and UPI can be a game-changer for the Indian fintech industry, as it opens up new opportunities for innovation, growth, and competition. With greater interoperability between payment systems, consumers will have more choice and flexibility in how they transact with merchants, leading to increased adoption of digital payments and ultimately driving financial inclusion and economic growth,” she added
“This is a step in the right direction to make the UPI pricing market-driven and competitive to incentivize the UPI players to recover costs and make additional investments as required. Further, the interoperability among PPIs via UPI will make PPIs more attractive for various use cases and ultimately increase the number of digital payment transactions,” feels Mihir Gandhi, Partner & Leader – Payment Transformation, PwC India..
No Impact on Consumers, Clarifies NPCI
What does this mean to the common consumers like us? Are we going to be charged for UPI transactions? The answer, at least for now as per NPCI clarification, is no. The users are unlikely to see any extra fee added to their transactions, albeit applicable in most cases.
The new fee on UPI transactions will only be applicable to merchants who accept payments over Rs 2,000 using prepaid payment instruments (PPIs) such as mobile wallets. Individual users making personal transactions using UPI will not be charged any additional fees.
Currently, most UPI transactions are for smaller amounts. The NPCI believes that by incentivizing PPI providers to promote UPI transactions for higher amounts, the average transaction value of UPI transactions can be increased, and the overall cost of payment systems in India can be reduced.
Amidst the confusion, Paytm Payments Bank took to Twitter to announce that the interchange fees will not be applicable on customers. This means that consumers will not have to bear any burden of paying extra charge on making payments from UPI either via bank account or Paytm wallet.
“Regarding NPCI circular on interchange fees & wallet interoperability, no customer will pay any charges on making payments from #UPI either from bank account or PPI/Paytm Wallet. Please do not spread misinformation. #Mobile payments will continue to drive our economy forward!,” Paytm Payments Bank tweeted.
The Story Behind the Charges
According to the NPCI, the proposed interchange fee is in line with the recommendations of the Committee on Payments and Market Infrastructures and the World Bank, which suggest an interchange fee of up to 1.15 per cent for UPI transactions.
The finance ministry had earlier ruled out levying any charges on UPI transactions, stressing that “UPI is a digital public good”.
The latest circular comes after the Reserve Bank of India (RBI) reportedly noted in a recent discussion paper that UPI transactions are similar to the Immediate Payment Service or IMPS. Hence, UPI transaction fees could be identical to the charges for IMPS fund transfers.
Since the PPI Wallets have been permitted to be part of the interoperable UPI ecosystem, NPCI has now allowed them to be part of that ecosystem, it added.
These charges had been much awaited by payment providers, because there were costs involved in providing the services, which were free of cost up until now.
UPI itself does not charge merchant discount rate (MDR), but it is charged for processing payments on debit and credit card transactions. For instance, UPI incurs a cost of Rs 2 for every transaction of Rs 800. The merchants with ticket items above Rs 2,000, on the other hand, will not be happy, and in one way or the other, these charges will be passed to the end customer.
Apprehensive Consumers not Convinced by Clarifications
Notwithstanding the clarifications from NPCI, consumers remain skeptic especially with the apprehension that merchants too would pass on the costs to consumers. There are worries that this could be a serious blow to the nascent but constantly growing digital payments industry.
Some feel that this is a bad move to save some money at the cost of blowing away nascent digital payment and forcing merchants to reverse back to cash economy. This is a pure myopic action without realizing its impact on cost saving which happens to the economy if we do away with the printing cost of security papers which are largely imported.
Some are even more scathing in their criticisms. The working class population has got hooked on to it and use digital payments in a routine manner. The government saw this phenomenon as an opportunity to earn revenue at the expense of working and low income groups.
This is indeed a retrograde step, some feel strongly. Digital payments aimed at replacing cash transactions which benefited RBI by saving on expenses of printing currency. .Also banks capitalized by reducing rented space and dispensed with staff through VRS. Now charging these digital transactions is actually going to be a huge burden on the commoner As it is the money has been taxed in various ways – income tax , direct tax while banks charge their fees in various ways and now to add to it this transaction fee is milking the cash cow with no recourse by the commoner.