What is UPI interchange fee and how it will impact digital wallet payments

A recent National Payments Corporation of India circular regarding UPI payments has caused a lot of confusion about whether transactions conducted using the platform will attract a fee or not.

The short answer to that confusion is that everyday users will not have to worry about paying a fee for making payments via UPI. Interested in the long answer that explains the confusion? Read on.

The National Payments Corporation of India (NPCI) has recommended a 1.1 per cent interchange fee on merchant​ UPI transactions of Rs 2,000 via digital wallets.

The fee comes into effect from April 1, and will be subject to review in September, according to an internal circular issued by NPCI.

Now, there has been a lot of confusion on who actually pays this interchange fee.

Let’s first see what the NPCI said in its press release issued today:
NPCI clarified that the interchange fee will not impact UPI bank-to-bank transactions and those will continue to remain free for both customers and merchants. These types of payments contribute to over 99.9 per cent of total UPI transactions.

For instance, if a customer pays a merchant using his bank account via UPI, then there is absolutely no charge involved on any side. Even if a customer uses Paytm UPI, for example, to pay on PhonePe QR or GooglePe QR using a bank account, it will not attract any charges.

Simply put, the interchange charge does not apply to UPI bank-to-bank payments, but on wallet payments made through UPI to a merchant, and that too only if the value exceeds Rs 2,000.

Since NPCI has permitted prepaid payment instrument (PPI) wallets to be a part of the interoperable UPI ecosystem – allowing people to use their Paytm or AmazonPay Wallet balance, for example, to pay on a PhonePe QR or Google Pay QR or vice-versa – the have introduced the interchange charge.

What is interchange charge on UPI wallet payments?
In simple terms, an interchange fee is paid by a merchant’s bank (the acquirer and QR code provider) to the customer’s wallet issuer for the acceptance of PPI-based UPI payments.

It may be noted that the interchange fee is typically a percentage of the transaction amount – 1.1 per cent for wallet UPI transactions over Rs 2,000 in this case – and has been set by the NPCI, which is the UPI network provider.

NPCI has made it absolutely clear that the interchange charges will be applicable only on PPI merchant transactions involving payments of Rs 2,000 or more via wallet-UPI.

This will have no impact on customers, who will be able to pay using their digital wallets to make UPI payments on merchant QRs issued by all payment platforms. “With this addition to UPI, the Customers will have the choice of using any bank accounts, RuPay Credit card and prepaid wallets on UPI enabled apps,” NPCI said.

Will merchants be impacted?

While the charge will be levied on the merchant side, it technically will not be levied directly from them.

The charge will be paid by the merchant acquirer (the one who sets up the QR code for the merchant) to a customer’s wallet issuer (the platform that provides the customer with his/her digital wallet).

This means that merchants will not directly be impacted by the interchange fee, as long as the acquirer does not pass it on to them. If the acquirer decides to pass on the charge, it may impact bigger merchants who are more likely to see PPI-based UPI transactions on a daily basis.

Therefore, the impact of the interchange fee will fall on banks or acquirers who have to pay this charge to customers’ wallet issuers. This will improve the revenue for payment service providers.

Meanwhile, NPCI has also recommended the PPI issuer of customers to pay 15 basis points as a wallet loading service charge to the remitter bank (the customers’ bank account) if the transaction value is greater than Rs 2,000.

This will essentially benefit the revenue of banks when customers load their wallets.

By introducing these two charges, NPCI seems to be aiming to promote interoperability of digital wallets by creating a level-playing field for both banks and wallet providers.