NPCI to Implement 1.2% Interchange for Pre-Sanctioned Credit Lines on UPI: A Game-Changer for Digital Payments

NPCI to Implement 1.2% Interchange for Pre-Sanctioned Credit Lines on UPI: A Game-Changer for Digital Payments

The National Payments Corporation of India (NPCI) is set to announce an interchange fee of 1.2% for transactions made using pre-sanctioned credit lines on the Unified Payments Interface (UPI). This decision, expected to be formalized through a circular next week, marks a significant development in the digital payments landscape in India.

Understanding the Interchange Fee Structure

The interchange fee, a critical component of the Merchant Discount Rate (MDR), is the commission paid by merchants to the credit issuer for each transaction. This fee constitutes 90% of the MDR, with the credit issuer receiving 100% of the interchange. The remaining MDR is distributed among other stakeholders, including card networks, customer banks, merchant banks, and NPCI, typically amounting to 5-15 basis points (bps).

Revenue Distribution and Stakeholder Involvement

Ongoing negotiations between NPCI, banks, and UPI apps aim to finalize each partner’s share of the revenue. Third-party apps (TPAPs) such as PhonePe, Google Pay, and Paytm are likely to receive 8 bps (0.08%) per transaction. Similarly, the Payment Service Provider (PSP) banks powering the UPI functions for TPAPs are expected to get around 8 bps as commission. Despite these discussions, the final rates may still vary.

Product Variants and Operational Dynamics

The pre-sanctioned credit line on UPI will offer multiple product variants. One version will feature an interest-free period similar to credit cards, while the other will function like overdraft loans, with interest charged from day one. To avoid operational complexities, both variants are likely to have the same interchange fee.

Constraints and Challenges

Person-to-person (P2P) money transfers using the credit line will be restricted, as these transactions do not generate interchange fees. Additionally, the reluctance of banks to promote this product stems from concerns that it could cannibalize their existing credit card business, which yields a higher MDR of around 2%.

Market Adoption and Strategic Implications

NPCI’s previous mandates have often required banks to participate in new products to ensure widespread adoption. The success of this initiative will largely depend on UPI apps' ability to market and encourage customers to use the new credit product. The recent success of RuPay credit cards on UPI suggests a positive outlook for this initiative.

Financial Inclusion and Market Dynamics

The credit line on UPI is designed to serve customers with loan requirements below Rs 50,000, offering a cost-effective alternative to traditional credit cards. This move is expected to disrupt the credit card market, which is currently dominated by major players like HDFC Bank, SBI Cards, ICICI Bank, and Axis Bank.

Conclusion

The introduction of a 1.2% interchange fee for pre-sanctioned credit lines on UPI represents a significant milestone in NPCI's efforts to innovate and expand the digital payments ecosystem in India. While challenges remain, particularly in achieving consensus among stakeholders and addressing concerns over MDR, this initiative has the potential to enhance financial inclusion and provide a competitive alternative to traditional credit products. As NPCI prepares to issue the formal circular, the industry eagerly anticipates the impact of this strategic move on the future of digital payments in India.

Prasad Ukidwe

Assistant General Manager at ICICI Bank

4 个月

Sir, why option / facility allowed at merchant end to disable receipt of payment from RuPay Credit card on UPI scanning QR code? How to pay using short term credit should be choice of consumer & not merchant, I think?

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Chetan Deshpande

Payment business enthusiast | Digital Banking | Credit Cards | Prepaid Card | BNPL | Project Management

4 个月

This is not only related to MDR but also acceptance by banks as product. As per RBI guidelines, this product is available for banks only. In most of banks UPI comes under umbrella of Payment business who also manages CC and this product may be probable threat to their CC or EMI business. Banks who launched this product, have modified their CC product or any nearing product to formalise product launch. This product will not make impact unless the product is offered thru fintechs. Beside this NPCI is launching too much product on UPI... Let customer absorb the innovations and new products. Forget about CBDC or voice commands to initiate UPI transaction. Customer even don't know UPI lite

Hayat Shaikh

Asst.Vice President & Regional Head at sbi payments (sales and marketing expert)

4 个月

As credit on upi is available only on rupay card ,popularising and distribution of rupay cards by bank will add value to this model

Satya Bhushan Joshi

Retired Banker | Top Executive from SBI

4 个月

This should benefit all stakeholders. Must be implemented at the earliest.

Biju Warrier

Accounting Manager at Fiserv

4 个月

Much needed initiative.

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