UPI transaction fee: Do prepaid cards, wallets stand to lose?
4 min read 30 Mar 2023, 10:32 PM ISTMint takes a deep dive to explain what it means, and who will be impacted.
PremiumNEW DELHI : The National Payments Corp. of India (NPCI), has introduced an interchange fee of up to 1.1% on merchant UPI transactions made via prepaid payment instruments (PPIs) like wallets and prepaid cards from 1 April. Mint takes a deep dive to explain what it means, and who will be impacted.
“For amounts over ₹2,000, using PPIs on UPI will result in interchange at 1.1% of transaction value," the NPCI said in a recent circular.
Starting at 0.5%, the charge will depend on the merchant category code and will be levied on UPI payments of over ₹2,000 made to e-merchants, large merchants and small offline merchants. Interchange fees are levied to cover the cost of accepting, processing, and authorizing transactions.
The circular created confusion among most consumers, so much so that NPCI had to come up with a clarification saying UPI will remain free for users, and the interchange fee will have to be paid by the merchants.
“However, if looked closely, it is not such a big development as it has been made out to be," a senior payments official said seeking anonymity. “PPI share in UPI transaction is very small, so this is not as big a move, and not really helping the industry," he added.
According to another payments executive, the industry has made several representations before the Reserve Bank of India and NPCI that it is not making money, and payment aggregators end up paying 3-4 basis points to banks for processing the UPI transactions. “MDR (the merchant discount rate paid by merchants for accepting payments) has been at zero for long. This has been the industry’s demand," Shilpa Mankar Ahluwalia, partner, Shardul Amarchand Mangaldas, said. “Having said that, PPI is a narrow sliver to make any difference in the market."
More than 80% of UPI transactions happens directly via bank, and the remaining 20% includes options to link debit cards and wallets. “A majority of 20% UPI transactions happens via debit card linked to bank accounts; and about 10% which is approximately 2% of the overall UPI transactions volume, might be happening via PPI," said Ketan Patel, chief executive officer, Mswipe.
The senior payment official cited above, confirmed that transactions via PPI on the UPI platform is about 2%.
Bringing interchange in PPI is seen a major step to promote interoperability, Mihir Gandhi, partner, payments transformation, PwC, said. “It has been more than a year that RBI announced PPI and UPI interoperability but it did not happen. Because of the MDR, the wallet players are now forced to open it up," he added.
The NPCI will review the pricing on or before 30 September, it said. In 2022, it announced the linking of Rupay credit cards to UPI, and said that merchants will be charged MDR.
But are the regulators testing the waters to bring in MDR gradually? In my sense, it is a strategy to test the market out. Significant volumes are being generated, so the idea may be to make it a sustainable business model," Ahluwalia said.
Promoting interoperability and introducing MDR back to now-established UPI ecosystem and the industry push could be the reasons behind this development, but interestingly this is also seen as anti-PPI move. If looked at from merchant point of view, industry officials believe that this could eventually kill wallets further since there are “cheaper alternatives already available for merchants."
One argument could be that PPI players such as Paytm, Amazon Pay and MobiKwik will make some share from the interchange, but are merchants willing to pay for something that has been free for long?
Majority (75-80%) UPI transactions are anyway under ₹2,000; and for above ₹2,000 there has been instances where merchants ask customers to split payments into multiple transactions to avoid interchange. “Just in case of 2% MDR in credit card transactions, many merchants ask customers to pay extra 2% because they don’t want to pay the extra charge," Patel added. “They returned the PoS (point-of-sale) machines because of MDR, as they are now used to free transactions."
In this case, a merchant doesn’t know how a customer is paying but next day when the settlement happens and they see the money being deducted, they will raise concerns with their bank and the acquirer. So, first the awareness leg is missing that merchant should know using which mode a customer is making UPI transaction and second if they know that customer is paying via a wallet, they can insist on paying directly via bank account.
According to one of the officials quoted above, the industry has asked NPCI to make a switch which will let the merchant know what transaction it is so that the merchant knows that some money will get deducted.
“I don’t know why everybody is going gaga over this, but this development is a sign that wallet players will take the most hit," one of the officials believed.
