Paytm, Google Pay, and Other Wallet Payments Will Attract 1.1% Fee From April 1

There are no free lunches in life, and now that the Indian citizenry is thoroughly used to digital payments, the same holds true for free UPI payments as well. National Payments Corporation of India (NPCI) has proposed an interchange fee on merchant transactions exceeding Rs 2,000 made through Unified Payments Interface (UPI) using Prepaid Payment Instruments (PPIs).

The NPCI has proposed an interchange fee of up to 1.1%, which will be levied from April 1. However, it plans to further review the pricing by September 30, 2023. The proposed fee aims to boost revenue for banks and payment service providers struggling with the high cost of UPI transactions.

Fees Will Not Affect Individual UPI Users, For Now

UPI is the most widely used payment system in India, enabling instant money transfers between bank accounts via mobile phones. Therefore, the prospect of paying transaction fees for a widely used service comes as a shock. However, individual users will not be charged for UPI transactions.

The new fee only applies to merchants accepting payments over Rs 2,000 using PPIs. These include pre-paid digital wallets, such as Paytm, PhonePe, and Google Pay, which allow users to store money and make payments.

Who Pays the Fee, and to Whom?

The interchange fee, charged by one bank to another for processing transactions, will be paid by the merchant's bank to the payer's bank in UPI transactions. While this technically shouldn't hurt the individual buying goods and services from merchants, some businesses are likely to transfer the burden to their customers-much like how some merchants pass on the credit card transaction fees to their customers.

The NPCI believes incentivizing PPI providers to promote larger UPI transactions will increase the average transaction value and reduce the overall cost of payment systems in India.

According to NPCI, the proposed fee aligns with the Committee on Payments and Market Infrastructures and the World Bank's recommendations, which suggest an interchange fee of up to 1.15% for UPI transactions. Having said that, the Reserve Bank of India (RBI) will make the final decision, as it regulates payment systems in the country.

Understanding the Variable UPI Fee Structure

Starting April 1, the interchange fee will be introduced and vary between 0.5-1.1% for different services.

Fuel will have a 0.5% fee, whereas services related to telecom, utilities/post office, education, and agriculture will attract a 0.7% fee. Meanwhile, supermarkets will have to contend with a 0.9% fee. Mutual fund, government, insurance, and railways will attract a 1% fee.

Fortunately, peer-to-peer (P2P) and peer-to-peer-merchant (P2PM) transactions will not be subject to the interchange fee. For transactions over Rs 2,000, PPI issuers will pay the remitter bank 15 basis points as a wallet-loading service charge.

Government Reneges on Its Promise to Keep UPI Free

If the RBI approves the recommendation, PPI providers and merchants may need to adjust their fee structures to accommodate the interchange fee, and merchants could face higher costs for accepting UPI payments. However, the NPCI believes the long-term benefits of promoting higher-value UPI transactions will outweigh short-term costs.

In August last year, the Finance Ministry stated that UPI was a digital public good and not considering levying charges on transactions made through it. The ministry's statement followed an RBI discussion paper suggesting that UPI charges could be similar to those imposed on Immediate Payment Service (IMPS) fund transfers.

The ultimate decision on the interchange fee proposal now rests with the RBI.