Increased Charges for UPI Payments: Who's Taking the Hit and What Are the Charges?

NPCI Steps In

Amid recent confusion surrounding the cost of using the Unified Payments Interface (UPI) for everyday transactions, the National Payments Corporation of India (NPCI) has stepped forward to clarify the situation. Amidst growing concerns, there were rumors that UPI payments, a staple in mobile transactions, might start incurring charges. However, the NPCI has put these worries to rest by confirming that bank-to-bank transfers via UPI will remain charge-free.

This clarification comes as a relief to millions who rely on UPI for seamless financial transactions. The NPCI has emphasized that traditional UPI transactions, which involve direct transfers from one bank account to another, will not be subject to any fees. UPI facilitates money transfers in three primary ways: by using the recipient's Virtual Payment Address (VPA), their account number coupled with the IFSC code, or by scanning a QR code. This announcement ensures that the convenience and efficiency of UPI payments continue without additional financial burden on the users.

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Understanding the Interchange Fee: Impact on Different Sectors

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Currently, the interchange fees applied to transactions via the Unified Payments Interface (UPI) are tailored according to the merchant's sector, with rates ranging from 0.5 percent to 1.1 percent. Additionally, there are caps in place for certain categories to moderate the impact on both merchants and consumers. Specifically, the fee structure is as follows: transactions within the telecom, education, and utilities/post office sectors attract a 0.7 percent fee. For supermarkets, the charge is slightly higher at 0.9 percent. The insurance, government, mutual funds, and railway sectors face a 1 percent charge. Meanwhile, fuel purchases are subject to a lower rate of 0.5 percent, and agricultural transactions incur a 0.7 percent fee.

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New Interchange Fee for Merchant UPI Transactions:

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Starting from April 1, 2023, a significant change will affect merchant UPI transactions exceeding ?2,000, when payments are made through prepaid payment instruments (PPIs) such as wallets or cards. A new interchange fee of 1.1 percent will be introduced on these transactions. Essentially, this fee is levied by the bank or payment service provider receiving the funds on behalf of the merchant.

The National Payments Corporation of India (NPCI) emphasizes that these interchange fees apply solely to merchant transactions conducted via Prepaid Payment Instruments (PPIs), ensuring that customers themselves do not bear any direct charges. This strategic move aims to facilitate the costs associated with making two different wallets interoperable within the UPI ecosystem. By integrating PPI wallets into this system, NPCI has established a 1.1 percent fee for UPI transactions exceeding ?2,000, leveraging PPI. This decision reflects an effort to sustain the ecosystem's growth while balancing operational costs.

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Who Bears the Interchange Fee? Merchant or Consumer?

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The interchange fee of 1.1 percent is specifically designed to affect transactions of ?2,000 or more that are executed from digital wallets to UPI IDs. This means that when a customer initiates a payment through a Prepaid Payment Instrument (PPI) like Paytm or Google Pay, and the payment is directed to a UPI ID associated with a different service, such as PhonePe's QR code, the merchant on the receiving end of the transaction is the one who will bear the cost of the interchange fee.

This setup implies that the fee is imposed on the merchants' side of the transaction. However, it's at the discretion of the merchants whether they decide to absorb this fee as part of their operating costs or to pass it on to the consumers by adjusting the price of goods or services accordingly. This structure aims to maintain the delicate balance between encouraging digital payments and covering the costs incurred by different entities within the UPI payment ecosystem.