NPCI may fix 1.2% interchange for credit line on UPI, notification next week: Report

The National Payments Corporation of India (NPCI) may announce an interchange of 1.2% for credit line on Unified Payments Interface (UPI) transactions, Moneycontrol reported quoting multiple sources. The report said that NPCI might issue a circular in this regard next week. 

A credit line on UPI is essentially a pre-approved loan available to customers who have a bank account linked to their UPI account. This credit facility may offer various products from different banks participating in the UPI platform. Interchange is the fee paid by merchants to the credit issuer for each transaction, constituting 90% of the merchant discount rate (MDR) they pay to banks for transaction facilitation. The credit issuer receives the full 100% of the interchange, while others, such as card networks, customer bank accounts, merchant banks, and NPCI, receive 5-15 basis points. Interchange helps cover the risk and interest associated with capital deployed by the credit issuer. This fee is paid by merchants, with consumers not bearing any cost in the transaction.

The talks are on between NPCI, banks and UPI apps over the revenue share and functionality. The third-party apps like PhonePe, Google Pay and Paytm will likely get 0.08% or 8 basis points commission for every transaction.

A digital banker familiar quoted in the report said that one version of the product will offer an interest-free period for customer credit, akin to credit cards, while the other version will require interest payments starting from day one, similar to overdraft loans. Both variants are expected to have the same interchange to simplify operations.

The credit line will not support person-to-person (P2P) money transfers due to the absence of interchange. As a result, these transactions will not be authorised. Therefore, if a merchant is conducting transactions using their personal savings account, they will not be processed.

Considering that banks have the primary authority over credit decisions and assume associated risks, it is understandable that the development of credit products is driven by issuers. However, there is some hesitance among banks to embrace credit lines on UPI, as initial adopters may predominantly consist of affluent, upwardly mobile individuals who are existing or potential credit card holders.

Credit cards typically yield a higher Merchant Discount Rate of approximately 2% and are more lucrative for banks. Consequently, there is concern that offering credit on UPI could potentially undermine the profitability of their card business.

Nevertheless, NPCI directives concerning UPI often require banks to actively participate in new initiatives to promote widespread consumer acceptance in the market.

“All the players active in the UPI ecosystem have been requesting this interchange for quite some time to enable them to run and scale this vertical in an economically viable manner. Looking at the adoption of UPI and clear convenience benefits extended to customers via Credit on UPI, this is a welcome move by NPCI which brings the CUPI at PAR with Credit Cards, where merchants are required to pay some charge to issuer banks. This will certainly help credit issuers to invest more in building robust infrastructure and support various marketing activities,” said Ankur Maheshwari, CFO, Freo.

"From the customer's point of view, they are indifferent as the interchange shall be payable by the merchant to the credit issuer. Initially, there may be some reluctance by the merchants to accept Credit on UPI as a payment option due to this additional levy of charge, however, CUPI will still be a more competitive option as compared to Credit Cards, where higher MDR (up to 2%)  is being charged on various Credit Card transactions,” he added.