A?turning point for Indian Fintech: NPCI's 1.1% Interchange Fee on UPI Payments through Wallet

India has experienced a significant uptake of UPI in recent years, and there are now many apps available that allow you to use your bank account and make UPI payments.

There are many apps in India that allow you to utilise your bank account and make UPI payments, and a sizable UPI ecosystem has grown there over the past few years. The data provided by NPCI over the years demonstrate UPI's extraordinary development; more than three years after its inception in 2016, the platform exceeded 1 billion transactions in October 2019. It conducted 3 billion transactions in July 2021, and over 74 billion transactions of Rs 125.94 trillion were processed through UPI in the entire calendar year 2022.

However, despite its tremendous growth and potential to lead the globe, UPI has struggled to generate income, which has put financial strain on the industry's banks, payment processors, and fintech firms. A wallet is now treated like a bank account thanks to the new regulations, which have made wallets interoperable on the UPI rail.

Wallets on UPI Rail Becoming Interoperable: New Possibilities for Industry Players

The updated regulations specify that wallets are now interoperable on the UPI rail, which equates to treating a wallet like a bank account. Now, a MobiKwik user can pay via UPI from their bank account or from their MobiKwik wallet by scanning the same UPI QR code, which they couldn't do before, when they scan a QR code from any other corporate app. There would be no merchant fee or MDR paid by the merchant for transactions under Rs. 2000 when payment is made from the wallet balance rather than the bank account.?For the vast majority of consumers and retailers, nothing changes as a result. For PPI transactions using UPI, there is a small fee of 1.1% that will be levied to the merchant as MDR for transactions over Rs 2,000. The majority of businesses still charge an MDR for user wallet transactions, so generally, neither businesses nor customers would be negatively affected by the NPCI announcement.

For transactions over Rs. 2000, NPCI will collect a 1.1% fee, which would be paid to MobiKwik as the issuer in this case. The MDR is nil if the transaction is less than Rs. 2000. Everyone who is affected will profit from this action. From the user's perspective, this is practical because they may keep a specific amount of money in their wallet and use it for all daily expenses without overtaxing their main savings account.?

Additionally, consumers can set up a simple PIN similar to how they do it for UPI transactions now, and money will be deducted from their wallet balance rather than having to input their PIN or OTP for each transaction each time they use a card.

The move offers banks, payment processors, and fintech firms additional revenue options as well, which will aid in the expansion and development of the payments sector. them can pick where to get money with the choice of wallets, and businesses can also accept various forms of payment, giving them more options.

Understanding Interchange Fee and How It Affects Businesses That Accept PPI Payments

An interchange fee is a cost incurred by one bank while executing a transaction with another bank. The bank of the merchant pays the bank of the payer the interchange fee in the case of UPI transactions. The new regulation proposed by the NPCI will only apply to businesses who take PPI payments for transactions of Rs 2,000 and higher. Despite these fees, the change is advantageous for businesses since it gives them access to other payment options, which customers can use to pay them via a wallet, and incremental transactions.

For instance, even with only Rs. 2000 in their bank account, a person can use a credit product or their wallet to purchase a smartphone for Rs. 5000.

As wallets can now be loaded via multiple payment methods like UPI, credit card, debit card, loyalty points, etc., users can choose where they want to draw money from, this is particularly helpful in smaller cities, towns, and villages in India where payment options may be constrained for both merchants and users. A small-town retailer without a POS machine, for instance, can only accept UPI payments. But they have a variety of different options now that they may accept wallets in addition to traditional payment methods.

In conclusion, NPCI's 1.1% interchange charge is a wise decision that will help users, small businesses, banks, payment players, and fintech firms. By offering the end user the option to make payments from any app and any mode, this action would accelerate the growth of digital payments and fintech in India and pave the way for a brighter future for the industry.