The National Payments Corporation of India (NPCI), which owns and runs the Unified Payments Interface (UPI), said on Wednesday that it has implemented fees on UPI transactions on only Prepaid Payment Instrument (PPI) merchant transactions, and not on regular bank-to-bank UPI transactions.
There is, however, more to the tale. There is a call from various sections to stop the subsidies system and permit consumers to be charged for UPI payments as India advances to new heights in digital payment ecosystem. Hindustan Times spoke to experts to understand the problem underlying the financial system.
Simplifying NPCI circular
According to a recent NPCI circular, Unified Payments Interface (UPI) transfers conducted through Prepaid Payment Instrument (PPI) such as wallets will incur an interchange charge of up to 1.1%. This implies that a PPI payment made via UPI, i.e. a transaction made using a wallet balance after scanning a UPI QR code will be charged an interchange fee above ₹2,000.
“If I go to a merchant and link my wallet, which could be a Paytm wallet or a MobiKwik wallet, Google Pay or others. And then I use that to make the payment. And if the transaction value is greater than 2000, then the merchant will not get the ₹2000, they will get ₹1978 (2000 - 22) after 1.1% deduction, similar to Merchant Discount Rate (MDR) that is there for debit and credit cards” explains Mihir Gandhi, partner & leader - payment transformation, PwC India. (ALSO READ: Paytm answers if customers need to pay fee on UPI payments after NPCI’s latest circular)
Rationale behind charging PPI payments
“The introduction of charges may encourage players to develop more seamless interoperable platforms. As a result, it is expected to promote greater innovation, competition, and opportunities in the payments landscape”, says Anup Nayar, chief executive- domestic, In- Solutions Global Ltd.
{{/usCountry}}“The introduction of charges may encourage players to develop more seamless interoperable platforms. As a result, it is expected to promote greater innovation, competition, and opportunities in the payments landscape”, says Anup Nayar, chief executive- domestic, In- Solutions Global Ltd.
{{/usCountry}}“Ultimately, consumers will benefit through improved services and user journeys,” he adds.
Will the fees be passed on to customers?
Gandhi is optimistic that the fees will not be passed on to consumers as merchants are also profiting directly or tangentially as a result of increased business due to digital payments. “To pay digitally at merchant locations actually increases the sales value of the merchant.”
UPI as 'free service' sustainable
Gandhi says that banks, technology companies, and fintechs that provide services to customers and merchants need money to keep these services running and to expand their technology. “From where will the money come and for how long will the government pay the subsidy that it is proposing as part of the budget. There is nothing like free lunch.”
“Merchants are also directly or indirectly benefiting because we are seeing increasing business due to digital payments,” he adds.
Nayar, on the other hand, points towards alternate business model. “To ensure that UPI continues to be a sustainable and viable payment option, payment service providers can innovate and incentivize customers to use the platform with prepaid options,” he says.
He says merchants can look into methods to provide discounts or extra services for UPI-based prepaid merchant purchases. “In the long run, this could make the UPI system more accessible and profitable for both customers and service providers.” (Read in detail| UPI: To charge or not to charge)
Will introduction of charges cause detour to digital payments revolution?
One of the reasons for UPI's amazing success, according to Nayar, is that it is free to use for one of the world's largest populations. He does, however, state that it is too early to make any forecasts. "Almost all of the UPI-led regulatory decisions have benefited the entire ecosystem."
However, Gupta disagrees and believes that the government should enable the costs to be imposed and not pay them out of its own budget. “I don't agree with the point that the digital ecosystem in India has grown because it's free. I think it's because of the innovation and products is because of the different convenience that we are providing to the customers.”