Explained: NPCI’s Interchange Fee For PPI-Based UPI Transactions

On March 24, the National Payments Corporation of India (NCPI) issued a circular saying that Unified Payments Interface (UPI) transactions of above INR 2,000 made through prepaid payment instruments (PPI) to merchants will attract an interchange fee of 1.1%.

While the circular largely went unnoticed initially, a statement by Paytm saying it is well poised to leverage the announcement brought the circular under the spotlight. 

The circular, which will come into effect on  April 1, noted that peer-to-peer (P2P) and peer-to-peer-merchants (P2PM) transactions will not be covered under the ambit of the new charges. 

As per the NPCI, P2PM transactions are classified as transactions with small merchants who have projected monthly inward UPI transactions of less than or equal to INR 50,000.

The interchange fee will only apply on payments made to online merchants, large merchants and small offline merchants.

In the card payment industry, interchange fee is the charge that merchants pay to issuer banks for every credit and debit card transaction. The fee covers costs related to authentication, verification and processing systems at different levels of debit and credit cards transactions. 

Meanwhile, PPIs are instruments that facilitate purchase of goods and services, conduct of financial services, enable remittance facilities, among others, against the value stored therein. Simply put, mobile wallets, gift cards, prepaid cards, among others, are PPIs.

As per the circular, the interchange fee will be lower for certain types of merchants. While UPI payments over INR 2,000 via PPIs will only attract an interchange fee of 0.5%, payments related to utilities, education and telecom will incur a fee of 0.7%.

The NPCI circular also said that PPI issuers would be liable to pay 15 basis points (bps) as wallet loading service charge to the remitter’s bank (account holder’s bank) for loading over INR 2,000 in the wallet. 

As the circular came into limelight, panic gripped many social media users as they thought they would have to bear the interchange fee for all UPI transactions above INR 2,000. 

To assuage the concerns, the NPCI, in a statement, on Wednesday, said that bank account-to-account UPI transfers account for more than 99.9% of the total UPI transactions and these transactions will continue to remain free for customers and merchants.

“… The interchange charges introduced are only applicable for the PPI 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.

Simplifying Jargon 

Let’s understand what the announcement means with a simple example.

If a consumer loads his/her Paytm wallet with INR 3,000 via his bank, say Axis Bank, then Paytm would be required to pay 0.15% of the amount, i.e. INR 4.5 to the bank. In the case of Paytm, if the remitter bank is Paytm Payments Bank, there would be no charges.

Next is the wallet interoperability issue. At the merchant’s end, there can be two scenarios:

1. A consumer pays via a wallet, say Paytm, to a merchant having QR code linked to Paytm wallet. In this case, no interchange will be levied
2. A consumer pays via Paytm wallet (PPI Issuer) to a merchant having QR code linked to a different wallet, say Mobikwik. In this case, Mobikwik (PPI Acquirer) will have to pay 1.1% of the total transaction amount to Paytm as an interchange fee. 

Now, here again there can be two scenarios:

1. Mobikwik will continue to bear the cost of keeping the merchant on board
2. Mobikwik will pass on the 1.1% cost to the merchant.

Explaining this, Paytm cofounder and CEO in a Twitter thread said, “Remember there is NO charge to consumer for  UPI payments from bank account or from wallets (or from RuPay credit cards). For merchant — ONLY if they agree to accept and ok to pay any charge levied by QR company, they will be activated.”

Impact on Wallet Issuers & Merchants

The biggest issue in front of waller issuers appears to be the wallet loading service charge that could run into tens of crores. A report by brokerage Citigroup estimates that such charges could run into INR 100 Cr for wallet issuers and would largely go to banks. 

“Based on Feb’23 annualised wallet payment transactions of INR 2 Tn, we estimate wallet loading charges could be >INR 1 Bn across all wallet issuers (assuming 30% of wallet transactions are eligible given transaction-size rule and an estimated 60% share of UPI in wallet-loading), and will be paid to banks,” the report said. 

There appears to be apprehension around small merchants with an annual turnover of less than INR 40 Lakh over the interchange fee. However, most of these small players or local vendors have an average transaction sizes largely under the threshold amount of INR 2,000. 

However, things can get complicated at the end of online and large offline merchants. According to an industry source, these merchants are already covered by the MDR regime and process payments through other PPI instruments such as credit cards, which charge the interchange fee at the rate of 1.8%. This, the source said, could complicate matters for such players and saddle them with additional compliances and charges. 

Then there is the issue of online merchants such as ecommerce platforms and foodtech players using the new regime to charge higher merchant discount rate (MDR) to their partners. According to industry experts, these platforms could deduct higher MDR from their partners’ wallets while processing payments, which could directly affect the customers.

Stage Set For MDR Regime?

Last year, the Reserve Bank of India (RBI) floated a discussion paper which mooted the idea of MDR on UPI payments. It caused a furore on social media as users said that the introduction of MDR would put speed breaks on the UPI juggernaut. 

Following this, Finance Minister Nirmala Sitharaman said that no such proposal for introducing MDR on UPI payments was under government consideration. Afterwards, the Centre also announced an INR 2,600 Cr incentive scheme to promote RuPay debit cards and low-value BHIM-UPI transactions under INR 2,000 for the financial year 2022-23 (FY23). With this, the Centre essentially bears a part of MDR for low-value UPI transactions.

However, the introduction of interchange fees for merchant transactions is being seen by many as the government laying the ground for a future introduction of MDR on P2M UPI payments. 

“… the newly defined interchange fees could lead to higher MDRs imposed on merchants’ wallet transactions completed via UPI-rails. Payment companies ability/willingness to pass on interchange fees as higher MDRs will be a key thing to watch. Further, does this also lay ground for a future introduction of MDRs on all UPI P2M transactions?” said Citigroup in its report.

While there is a lot at stake, it remains to be seen how the issues pan out over the course of the next few days and if the Centre offers any clarification on the matter. For now, the ball is in the NPCI’s court.