UPI Transaction Fee

Table of Contents

Context: NPCI has fixed an interchange fee of 1.1% for using PPIs for transactions above Rs 2,000 using UPI.

What are PPIs?

They are instruments of payment that facilitate buying of goods and services, including the transfer of funds, financial service and remittances, against the value stored within or on the instrument.
The value stored is represented by the value that has already been paid for by the holder.
PPIs can come in the form of payment wallets, smart cards, magnetic chips, vouchers, mobile wallets etc.

Types of PPIs

Closed system: It is only valid when used against purchases from the entity which issued it in the first place.
Semi-closed system: Can only be issued by banking institutions approved by the RBI or non-banking institutions authorized by the RBI.
Open system: Can only be issued by banking institutions that have been approved by the RBI. Ex: Debit cards and credit cards.

Interchange fee

It is a small fee that is charged by one bank to another bank for processing a transaction.
Currently, interchange fee is paid by the bank of the merchant (receiver) to the bank of the payer.

Decoding the New NPCI Guidelines

What are the new NPCI Guidelines?
- PPI Merchant transactions above Rs 2000: The 1.1% interchange fee is not applicable to customers but only to UPI merchants, especially PPI merchant transactions.
  - Hence, UPI payments made only through PPIs such as digital wallets (Ex: PayTM) will attract 1.1 per cent fee if the transaction value is Rs 2000 and above.
  - About 99.9% of the traditional UPI transactions, conducted through bank-to-bank mode, will be free of charge like earlier.
- Loading money into PPI: PPI issuer will have to pay 0.15% wallet loading charges to the remitter bank for loading money over Rs 2000.
Impact on Peer to Peer (P2P) Transactions:
- No charges will apply to individuals conducting P2P transactions (either through bank-to-bank mode or through PPI). It will only apply to merchant transactions.
- Since UPI is a digital public good, which is convenient for the public and has productive gains for the economy, P2P transactions will remain non-chargeable.
Will interchangeability fees apply to Peer to Peer Merchant (P2PM) Transactions?
- Peer to Peer Merchant (P2PM) transactions (merchants who receive up to Rs 50,000 per year through UPI) will not come under the new guidelines.
  - Merchants receiving more than Rs 50,000 per year through UPI will come under the purview if they receive Rs 2000 or more through PPIs.
- In addition, it will not apply to bank-to-bank transactions. The guidelines are only aimed at PPI transactions, especially digital wallets.
Need for the new Guidelines:
- The new guidelines on charging an interchange fee, is primarily aimed at increasing revenue for banks and payment service providers, who have been facing high cost of UPI transactions.
- It will facilitate inter-operability of UPI transactions as one can pay money from wallet of one payment platform using service provided by another payment platform.
- Payment providers will be encouraged to promote large value transactions as they will receive interchange fees and reduce cost per transaction.
Impact of the new Guidelines:
- There are chances that merchants may start charging extra from buyers in an attempt to make up for the interchange fee.
- Some merchants will start promoting use of debit card or credit card instead of UPI. This may result in reduction of UPI transactions.

National Payments Corporation of India (NPCI)

NPCI is a not-for-profit organization set up by the Reserve Bank of India and Indian Banks’ Association and registered under Section 8 of the Companies Act 2013.
- It works under the provisions of the Payment and Settlement Systems Act, 2007.
Services offered by NPCI include UPI, BHIM, Aadhar enabled payment system, BharatQR, BHIM Aadhar pay, Cheque Truncation System, Digital Rupee, Immediate Payment Service, National Automated Clearing House, National Electronic Toll Collection, RuPay, National Financial Switch, *99# USSD, UPI 123PAY.