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31 March 2023: Fee modifications for merchant UPI transactions

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Context:

Prepaid payment instruments (PPIs) may now be a part of the interoperable Unified Payments Interface (UPI) environment, thanks to permission from the National Payments Corporation of India (NPCI).

  • Interchange fees of up to 1.1% have lately been implemented by the NPCI for merchant UPI transactions made with prepaid payment instruments (PPIs), starting on April 1

NPCI

  • The retail payment and settlement networks in India are run and managed by the non-profit National Payments Corporation of India (NPCI).
  • In 2008, it was set up by a group of important Indian banks, such as the State Bank of India, Punjab National Bank, and Canara Bank.
  • The group’s main goal is to build a strong, safe, and inclusive payments ecosystem in India.
  • The Unified Payments Interface (UPI), which was released in 2016, is the company’s main product. It lets users move money between bank accounts instantly using a mobile device.
  • Additionally, it oversees the management of the Bharat Bill Payment System, the Immediate Payment Service, and the National Electronic Funds Transfer (NEFT) (BBPS).
  • To allow digital payments through their platforms, NPCI recently partnered with important technology firms like Google, Amazon, and WhatsApp.
  • For its services to the Indian payments sector, NPCI has been honoured with prizes like the Skoch Award for Financial Inclusion in 2020.
  • Currently, the Reserve Bank of India and the Indian government fund the NPCI, which has over 200 member banks and financial institutions.

Prepaid Payment Instruments (PPIs)

  • Using the value they store, PPIs make it easier to buy goods and services, do financial transactions, send money to other people, etc.
    • Smart cards, magnetic chips, and web wallets (like Paytm Wallet, Amazon Pay Wallet, PhonePe Wallet, etc.) are all examples of PPI.
    • A PPI payment made through UPI is a transaction carried out using such a device and a UPI QR code.
  • Both banks and non-banks may issue PPIs.
    • PPIs may only be issued by banks with RBI permission.
    • Companies established in India and registered under the Companies Act of 1956/2013 are non-bank PPI issuers.
  • PPIs for closed systems
    • A company only issues these PPIs to make it easier for customers to buy products and services from that company. No cash transfers are allowed. These instruments cannot be used to pay for or resolve the provision of services by third parties.

Key Points:

  • Application: The new NPCI wallet interoperability rules set an interchange fee for wallet usage that will be paid to the providers of wallets like Paytm, PhonePe, and Google Pay, among others.
    • Also, they include UPI wallet loading fees that wallet issuers will charge to the banks that send the money or the bank accounts that will be used to get the money.
  • Benefits for participants with wallets:
    • The universal acceptance of wallets across all UPI QR codes and devices will be made possible by the interoperability standards, which will increase the salience or relevance of wallets.
    • In contrast to the way things are done now, where wallet issuers and payment platforms make separate agreements, this will make sure that everyone is on the same page by setting the interchange fees on wallet payments.
  • Interchange fees: The interchange rates run from 0.5 per cent to 1.1 per cent and depend on the merchant category codes.
    • Fuel, schooling, agriculture, and utility payments are some of the categories with lower interchange rates of 0.5–0.7 per cent. Contractors, speciality stores, and convenience stores have the highest interchange rates of 1.1 per cent.
  • Wallet transactions: Most of the time, merchants pay wallet or card issuers the interchange costs.
    • Since the rule only applies to payments over Rs 2,000, it is unlikely that it will hurt smaller retailers and shop owners.
    • MDR, which stands for “merchant discount rate,” is sometimes used with wallets-on-UPI. Depending on the ability and willingness of payment companies to pass on the interchange, this change may cause MDRs to go up for merchants.
  • Impact on consumers: Now that wallets can be used to make UPI payments using QR codes and other devices, the norms are expected to make wallets more appealing, useful, and flexible and give consumers more ways to pay.
    • Customers will also be able to add money to their wallets using a variety of methods, such as credit or debit cards, BNPL (Buy Now, Pay Later), and online banking. This will allow them to use any instrument, directly or indirectly, for UPI transactions.
    • MDR for bank-to-bank UPI transfers is currently zero.

Indian digital transactions

To strengthen the financial sector and better the lives of its people, the Indian government has been working to increase the number of digital transactions in the country’s economy.

  • Several services have grown a lot in the last five years, including Immediate Payment Service (IMPS), National Electronic Toll Collection (NETC), and Bharat Interface for Money-Unified Payments Interface (BHIM-UPI).
    As of January 2023, BHIM UPI had processed 803.6 billion digital payments worth $12.98 trillion. This made it the most popular way for people to pay.

Digital payment process status:

  • 9,192 crore in digital purchases in total between 2022 and 2023.
  • 2,050 lakh crore will be spent on digital purchases between 2022 and 2023.

Issues with digital payments:

  • Digital illiteracy: Many people, particularly in rural areas, may not be familiar with digital payment methods and may have trouble using them.
  • Connectivity problems: To do digital transactions, you need a reliable internet connection, which may not be available everywhere. The payment procedure may be delayed and interfered with as a result.
  • Security issues: Cyber threats and scams may target digital payments. Malicious actors are capable of stealing private financial data and carrying out unauthorized activities.
  • Technical errors: Technical errors that happen during digital transactions could result in unsuccessful transactions or inaccurate transfers.
  • Transaction costs: Some digital payment systems might impose transaction fees, which may put off users.
  • Limited acceptance: Particularly in remote locations, not all businesses and service providers may accept digital payments.
  • Over-reliance on technology: People may be more susceptible to disruptions in the event of technical difficulties or system outages if they rely heavily on digital payment systems.

Benefits of using digital payments:

  • Digital payment methods like BHIM-UPI and IMPS make it possible to send money right away to the account of the person receiving the money. Access to numerous bank accounts is now possible through a single mobile app, thanks to BHIM-UPI.
  • Enhanced financial inclusion: Digital payments make it simple for people to receive and send payments using their phones by providing anytime, anywhere access to accounts. UPI 123Pay, which was just released, lets people with feature phones do digital transactions through UPI in assisted voice mode. This helps people in rural areas get access to financial services and use digital transactions.
  • Increased transparency in the government system: When benefits are digitally transferred directly to the account of the intended recipient, there are no more leaks or “ghost receivers.”
  • Better speed and quick delivery: Digital purchases can be made almost instantly, no matter where the sender and the recipient are.
  • National Electronic Toll Collection (NETC) System: Using radio frequency identification technology, the NETC system allows electronic payments at toll plazas.
  • Bharat Bill Payment System (BBPS): Through a variety of platforms, including Internet banking, mobile banking, mobile apps, BHIM-UPI, and more, BBPS offers customers an interoperable and simple bill payment service.
  • Enhanced Credit Access: The financial footprint that digital payments leave behind makes it easier for people to access official financial services, including credit.
  • Digital payments are safe and secure because people don’t have to travel long distances to get them and are safer than cash payments.

Way forward

  • Digital transactions have become an important part of modern business because they are easy, safe, and fast for customers and businesses.
  • Regulators need to look into different ways to pay, such as UPI and digital wallets, which lower transaction costs.
  • In general, the pros of digital transactions outweigh the cons, and as technology improves, we can expect the payments industry to keep coming up with new ideas.