India's NPCI introduces interchange fees for UPI transactions made through digital wallets.

The National Payments Corporation of India (NPCI) has implemented a recommendation to introduce an interchange fee on transactions made through Prepaid Payment Instruments (PPIs) using Unified Payments Interface (UPI). The fees will only affect transactions of over Rs 2,000, and are intended to increase revenue for banks and payment service providers who are struggling with the high cost of UPI transactions. The fee will be levied from 1 April 2021, and the pricing will be reviewed by September 30, 2023.

What does this mean?

The introduction of fees only applies to UPI payments made through PPIs, meaning digital wallets like PayTM wallet, that exceed a value of Rs 2,000. Transactions worth less than Rs 2,000 will not generate fees, which will be levied on the merchant side. Merchants may pass the extra fees onto consumers, but regular UPI transactions, made directly from bank account to bank account, remain free.

UPI is currently the most popular method of transferring money between bank accounts in India, allowing for instant payments using mobile phones. PPIs are digital wallets that allow users to store money and make payments.  

 Paytm, PhonePe and Google Pay are examples of PPIs available in India.

Understanding Interchange Fees

Interchange fees are a fee charged by one bank to another for processing a transaction. In the case of UPI transactions, the merchant’s bank must pay the interchange fee to the bank of the payer.

The Interchange Fee Implementation

In clarifying the new fee, the NPCI confirmed that the charges are only applicable to merchants that accept payments over Rs 2,000 via PPIs. The body that runs and manages the UPI system added that individuals making personal transactions using UPI won’t be charged any additional fees.

The NPCI believes that by incentivizing PPI providers to promote UPI transactions for higher amounts, the average transaction value of UPI transactions can rise, resulting in lower overall costs for payment systems in India.

The NPCI proposal views the existing interchange fee level as comparable with suggestions from the World Bank and the Committee on Payments and Market Infrastructures. These recommend interchange fees of up to 1.15% for UPI transactions.

Conclusion

The new fees announced by the NPCI received a mixed reaction, with some arguing that UPI’s simplicity is heading in the wrong direction. It could prove a more challenging experience, with merchants hit with additional charges they may pass onto consumers. It's also anticipated that there are fears the charge will slow down usage of PPIs with end-users potentially turning to cash more due to the added expenses.

However, others believe the move is reasonable and encourage PPI companies to leverage UPI transactions and offer a value-added service at affordable charges. The use of UPI continues to grow year on year in India; the rate of adoption means the financial ecosystem remains in the midst of change, adaptable to new concepts and modalities.