Updated at 12.50pm on 29 March 2023 to add NPCI's statement
The National Payments Corporation of India (NPCI) has suggested unified payments interface (UPI) transactions made via prepaid instruments like wallets, or cards should carry an interchange fee of 0.5% to 1.1% for payments made to online merchants, large merchants, and small offline merchants above Rs2,000, say media reports. Currently, there are no charges on UPI transactions at all, although the UPI ecosystem incurs a cost of Rs2 for every transaction of Rs800. While UPI is creating new records for the number of transactions every day and the amounts transacted, most service-providers such as banks, merchants and even NPCI itself are not very happy about having to provide free service. While media reports suggest that NPCI recommendation seems to be made internally, it would be up to the Union ministry of finance or Reserve Bank of India (RBI) to accept or reject it, especially considering the ministry's clarification last year that no service charge would be levied on UPI transactions.
Quoting a circular allegedly issued by NPCI, Economic Times (ET) says
, "Using prepaid payment instrument (PPIs) on UPI from will attract interchange at 1.1% on transaction value for amounts over Rs2,000."
"The PPI issuer will pay about 15bps (basis point) as a wallet-loading service charge to the remitter bank, and an interchange is not applicable in terms of peer-to-peer (P2P) and peer-to-peer-merchant (P2PM) transactions between bank account and PPI wallet," says a report from CNBCTV18.
According to a report from BloombergQuint,
the interchange fee is typically associated with card payments and is levied to cover the costs of accepting processing, and authorising transactions. "The fee will not be applicable to person-to-person transactions or person-to-merchant transactions between a bank and the prepaid wallet. While the 1.1% interchange fee is a broad levy, certain types of merchants will also be eligible for a lower interchange levy. For instance, payments made to fuel service stations via UPI using a prepaid instrument will only carry an interchange of 0.5%," the report says.
According to the reports, the interchange fee ranges between 0.5% to 1.1%. It suggested the lowest interchange fee of 0.5% should be applied to fuel payments. Transactions above Rs2,000 related to telecom, utilities, post office, education, and agriculture, should attract an interchange fee of 0.7%. For UPI transactions at supermarkets and for mutual funds, government, insurance and railways, the fee should be 0.9% and 1%, respectively.
The interchange would not be applicable in terms of peer-to-peer (P2P) and peer-to-peer-merchant (P2PM) transactions between bank accounts and prepaid payment instrument (PPI) wallets, the reports say.
Levying interchange fees on UPI transactions would be the first step to making the ecosystem viable. The UPI platform does not charge merchant discount rate (MDR) to merchants, although it is charged for processing payments on debit and credit card transactions. The MDR is capped at 0.9% for debit cards. For using credit cards on UPI, there are no charges up to Rs2,000. Cards offered by Visa and MasterCard, typically, have an MDR of 200bps (basis points) for credit cards and 50bps for debit cards. Credit cards from RuPay charge a lower MDR, while there is no MDR for its debit cards.
Last year, a top industry expert told Moneylife that the zero MDR on UPI is not a viable solution for the long term, and the Union government should allow charges at least for more prominent merchants and platforms and payments above Rs1,000.
MDR is charged to merchants for accepting digital payments.
The expert says, "Zero MDR is not a viable solution. When people are not commercially compensated, they may have to look up other options. Market players will have to make money from other means. However, this may not be good for the country."
Zero MDR for small merchants has actually benefited merchants and consumers in the initial days and led to massive adoption of digital payments, especially for small payments to roadside vendors and others. However, the incentive becomes absurd when it is equally applicable to large-ticket spending and big players.
"Why are we giving it free to big players like Amazon and Flipkart? Large offline and online retailers are not even bothered if the consumer uses UPI or other payment methods. They just want you to pay and complete the transaction. They do not want the customer to pay by cash because the returns for cash on delivery are around 25%. So 1% or 2% MDR has no bearing on such merchants," the expert pointed out. (Read: For How Long Will the UPI Ecosystem Survive without MDR Charges?)
In August this year, the Union finance ministry clarified that no service charge would be levied on UPI transactions. "UPI is a digital public good with immense convenience for the public & productivity gains for the economy. There is no consideration in Govt to levy any charges for UPI services. The concerns of the service providers for cost recovery have to be met through other means," it says in a tweet.