UPI payments: Which transactions will attract NPCI’s 1.1% interchange fee? Check details here

UPI transactions: The National Payments Corporation of India (NPCI) recently notified that an extra interchange fee of up to 1.1 per cent will be charged on merchant Unified Payments Interface (UPI) transactions with effect from April 1. The transactions of over Rs 2,000 using prepaid payment instruments (PPIs) – wallets or cards – will attract these charges. No charges will be levied on normal customer transactions or bank account to bank account-based UPI payments.

The interchange fee will be applicable on UPI payments made to online merchants, large merchants and small offline merchants. However, all transactions will not attract the same surcharge. The NPCI has given certain merchant categories, and the interchange fee range which might be levied as per applicable caps.

What is Interchange fee?

An interchange fee can be described as the fee that is charged by the receiver bank/payment service provider to the merchant.

It is levied to cover the costs of accepting, processing, and authorising transactions.

The charges are being introduced to increase revenue of banks and payment service providers who have been struggling with the high cost of UPI transactions.

Which transactions will attract NPCI’s interchange fees?

1. The charges are applicable if the users use UPI to load their wallets for amounts above Rs 2,000.
2. The NPCI circular notified that the PPI issuers will have to pay 15 bps (basis points) as a wallet-loading service charge to the account holder's bank for transactions above Rs 2,000.
3. Prepaid payment instruments (PPI) include wallets, preloaded gift cards, and others, which are issued by banks, payment banks.
4. Apps like paytm-partner-with-npci-to-introduce-credit-card-transactions-on-upi-375256-2023-03-29">Paytm, PhonePe, Amazon have wallet facilties within their apps, like Paytm Wallet, PhonePe Wallet, Amazon Pay, Freecharge Wallet, etc.
5. As per NPCI proposal, the issuer of pre-paid instruments like Paytm or Ola Financial Services, and others will have to pay 15 basis points as wallet loading charges to the remitter bank, i.e. the account holder's bank if more than Rs 2,000 is loaded.
6. The interchange fee will also be applicable in the range of 0.5-1.1 per cent on various services. An interchange fee of 0.5 per cent will be applicable on fuel, 0.7 per cent for telecom, utilities/post office, education, agriculture, 0.9 per cent for supermarket, 1 per cent for mutual fund, government, insurance and railways.

Interchange fee	Services (as mentioned by NPCI)
0.5%	Fuel
0.7%	Telecom, utilities/post office, education, agriculture
0.9%	Supermarkets
1%	Mutual Funds, Government, Insurance and Railways

Which transactions will NOT attract NPCI’s interchange fees?

The interchange fee would not be applicable on peer-to-peer (P2P) and peer-to-peer-merchant (P2PM) transactions between a bank account and a PPI wallet. Therefore, no charges for normal customer transactions or the bank account to bank account-based UPI payments.

NPCI in a tweet said: "UPI is free, fast, secure and seamless. Every month, over 8 billion transactions are processed free for customers and merchants using bank-accounts."

Therefore, payments made via UPI, like Paytm, Phonepe, Google Pay, to friends, family or any other individual or a merchant’s bank account will not be affected by this interchange fee.

Who will pay these charges?

For example, if a buyer is making a PPI payment via UPI (Paytm or Google Pay) at a store or online, and the QR code is that of PhonePe, then PhonePe will receive the applicable interchange fee from the merchant.

In the case of UPI transactions, the interchange fee is paid by the bank of the merchant (the person or business receiving the payment) to the bank of the payer (the person making the payment).

NPCI proposal

The NPCI has clarified that the proposed interchange fee is in line with the recommendations of the Committee on Payments and Market Infrastructures and the World Bank, which suggest an interchange fee of up to 1.15 per cent for UPI transactions.

The fee now awaits the Reserve Bank of India’s (RBI) approval. If given a nod, the new fee structure will have a significant impact on PPI providers and merchants.

PPI providers may rejig their fee structures to account for the interchange fee, and merchants may face higher costs for accepting UPI payments.

Last year in August, the Union Finance Ministry clarified that UPI is a digital public good and that it was not considering levying any charges on transactions made through it. “UPI is a digital public good with immense convenience for the public and productivity gains for the economy. There is no consideration in Govt to levy any charges for UPI services. The concerns of the service providers for cost recovery have to be met through other means,” the ministry tweeted.

Industry speak

According to Citibank Research's estimates, wallet loading fees across all wallet issuers may cross Rs 100 crore based on wallet payment transactions of Rs 2 lakh crore in February 2023.

Additionally, Paytm Payments Bank, which has over 10 crore users, stated that its wallets will be accepted on all UPI QRs and online merchants with interoperability enabled.

Speaking about the NPCI circular, Paytm Payments Bank tweeted: "Regarding NPCI circular on interchange fees & wallet interoperability, no customer will pay any charges on making payments from #UPI either from bank account or PPI/Paytm Wallet. Please do not spread misinformation. #Mobile payments will continue to drive our economy forward!"

"This is a step in the right direction to make the UPI pricing market-driven and competitive to incentivise the UPI players to recover costs and make additional investments as required. Further, the interoperability among PPIs via UPI will make PPIs more attractive for various use cases and ultimately increase the number of digital payment transactions," said Mihir Gandhi, Partner & Leader - Payment Transformation, PwC India.