BENGALURU: In the last few years, Unified Payments Interface (UPI) has become the preferred mode and also the inclusive mode of payment in the country. According to the Reserve Bank of India, over 26 crore digital payment transactions are processed daily by payment systems, of which the UPI system alone processes over two-thirds.
Last week, when the National Payments Corporation of India (NPCI) issued a circular regarding an interchange fee of 1.1% on UPI transactions, there was a lot of confusion and also questions about whether customers will be charged for UPI transactions.
But the retail payments and settlement body immediately clarified that there are no charges for a bank account to bank account-based UPI payments and that interchange charge has been introduced only for prepaid payment instrument (PPI) merchant transactions.
Paytm CEO and founder Vijay Shekhar Sharma tweeted that there is no charge to consumers for UPI payments from bank accounts or 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. Right now the government is paying for payment charges to be charged to merchants for payments from UPI,” he said. From April 1, 2023, an interchange fee is being levied on merchant payments above R 2,000 to specified merchant categories.
No fee for the ultimate users
At present, when consumers do UPI transactions, who is bearing the cost? Shashank Sharma, Director at Scoreme Solutions, said the actual operators through the UPI, like Paytm, Google Pay etc and banks are bearing the operational cost as no fee was so far levied on the ultimate user - the customer.
“All transactions routed both by the commercial banks as also the payment facilitators operating through the UPI platform were bearing their respective costs depending on the number of transactions handled,” he added.
NPCI’s recent move will result in revenue generation for payment service providers, assisting them to achieve and maintain profitability on UPI transactions, said Akash Sinha, CEO and Co-Founder, of Cashfree Payments.
“This will in turn enable them to improve their service quality as well as innovate and devise effective solutions. This is significant in ensuring the interests of all stakeholders in the payments ecosystem, catalysing the sustainable growth of the sector,” Sinha added.
P2P & P2PM transactions
Sinha explained, “In Peer to Peer (P2P) payments, a user transfers funds from his bank account to another individual’s account using digital mediums like net banking and UPI. So, if an individual is sending money to friends, family or any other individual or a small business merchant’s bank account, it will not attract an interchange fee. As stated by NPCI, the interchange fee will not apply to P2P transactions or P2PM(peer-to-peer-merchant) transactions between a bank and the prepaid wallet.”
NPCI spoke about interchange fees in its circular. Who will have to pay for this? “The acquiring bank (which is the bank of the merchant) will have to pay the interchange to the Issuing Entity, and likely this charge will be recovered from the merchant in some form,” Harish Prasad, Head of Banking- India, FIS, told TNIE.
Prasad added that the PPI Issuers will benefit from this move as their service to use UPI for merchant payments using their wallet/card was not resulting in any direct revenue to the PPIs, and they have been out-of-pocket on the costs involved. In its vision statement, the RBI said UPI to register average annualised growth of 50% and IMPS / NEFT at 20%.
UPI is the payment method of choice for most of the customers in the current digital ecosystem. It offers the end customer security as well as convenience to transact, said Ramakrishnan Ramamurthy, Executive VP, of Worldline India.
“The scale of UPI has only been growing exponentially YoY. Given that it is a public good and at the centre of digital transformation in India, we do not see the commercials being enforced on it in the near future,” he added. RBI Governor Shaktikanta Das at an event recently said that the launch of UPI in 2016 has revolutionised the payments ecosystem with about 803 crore transactions worth R13 lakh crore processed in January 2023 alone.
He said, “Our home-grown payment products, UPI and RuPay network, are enhancing their global footprint. The launch of UPI linkage with Singapore’s PayNow is a major step forward. In future, such linkages with other countries will make cross-border payments simple, affordable and real-time. QR code-based merchant payments through UPI apps are already enabled in Bhutan, Singapore and UAE.”
Future of UPI
When asked what the future of UPI looks like and how long can it be free? Harish Prasad said that neither consumers- account holders, nor merchants have had to pay for the service as a transaction-linked charge so far, and this situation has been described as unsustainable by many in the industry given the increasing costs for banks, issuers and PSPs of processing UPI transactions.
“This is putting a lot of pressure on NPCI and the regulator to relax this view, lest the quality of services starts to suffer,” he said. He does expect relaxations on this position to be incrementally introduced over the next year or two.
“The beauty of UPI is that it provides rails for a variety of use cases which can go well beyond retail payments and start to increasingly make sense for B2C, C2B and even B2B payments. The rails will also expand to cover more account types and that will also likely lead to further expansion in volumes. The simplicity of transacting via a simple identifier such as a phone number makes for a compelling benefits case for newer payment use cases,” he added.
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