UPI transaction fee: Do prepaid cards, wallets stand to lose?

Source: The post is based on the article “UPI transaction fee: Do prepaid cards, wallets stand to lose?” published in The Hindu on 31st March 2023

What is the News?

The National Payments Corp. of India (NPCI), has introduced an interchange fee of up to 1.1% on merchant UPI transactions made via prepaid payment instruments (PPIs) like wallets and prepaid cards from 1 April.

What does the NPCI circular say?

As per the circular by NPCI, certain UPI merchant transactions made via prepaid instruments will carry an interchange fee of up to 1.1% of the transaction amount.

The interchange fee will be applicable on specified categories of merchants such as online merchants, large merchants, and small merchants for transactions of over Rs 2,000 from April 1, 2023.

What about sending money to friends, family or any other person via UPI?

The interchange fee will not be applicable to peer-to-peer (P2P) transactions or peer-to-peer-merchant (P2PM) transactions between a bank and the prepaid wallet.

P2PM is the NPCI classification for small businesses which have a projected monthly inward UPI transaction of less than or equal to Rs 50,000. 

So, if one 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.

Which UPI payments will attract an interchange fee then?

Only certain merchant transactions made by prepaid payment instruments will attract the interchange fee. Wallets, smart cards, vouchers, magnetized chips come under prepaid payment instruments. A few examples of wallets are the Paytm wallet, PhonePe wallet, Amazon Pay, MobiKwik wallet, SODEXO vouchers.

Now suppose, one has money in his/her Paytm or PhonePe wallet and go to a store and scan the QR code and pay it from the wallet. If the transaction amount is above Rs 2,000, an interchange fee of up to 1.1% will be levied.

Who will have to pay these interchange fees?

Interchange fees are transaction fees that the merchant has to pay whenever a customer processes a transaction. 

So, if one is making a prepaid payment through UPI at a store using a PhonePe QR code, the merchant has to pay the interchange fee to the payment service provider, which is PhonePe here. Users do not have to pay any interchange fee.

How will this benefit the payment services providers such as Paytm, PhonePe, and Amazon Pay?

This decision is expected to bring in much-needed revenue for payment service providers, who have been struggling to maintain profitability due to the low-transaction fees on UPI transactions.