No, not every transaction over Rs 2,000 will be chargeable on UPI

In a March 24th circular, the National Payments Council of India (NPCI), the operating body behind Unified Payments Interface (UPI), announced the introduction of an interchange fee for merchants, in case of UPI transactions being made through an online wallet. The latter, which itself was enabled by the NPCI earlier this month in new efforts to make all forms of digital payments interoperable in the country, led to confusion from users in terms of expecting to pay a transaction fee on UPI, going forward.

That, however, is incorrect. Here, we take a look at how UPI interchange fees will work, whom they will affect, and how users may be affected as a result of the new NPCI decision.

What are UPI interchange fees?

The UPI interchange fees are a margin of transaction fees that the NPCI has announced, which will come into effect from Saturday, April 1st. Once applicable, the fees will be applicable only on UPI payments made from digital wallets, with singular amounts of above Rs 2,000. The fees are being levied for ‘interchanging’ the payment medium and supporting a digital wallet on the UPI network.

The fees range from 0.5 to 0.7 percent in sectors such as fuel and utility payments, 0.9 percent in supermarkets, and 1.1 percent in convenience stores and retail outlets. In some sectors, such as government utilities, education, and agriculture, where UPI payments are made from digital wallets, the interchange fee is also capped. These caps include Rs 5 for railway transactions, Rs 10 for agriculture and government payments, and Rs 15 for education utilities.

So far, UPI QR codes only supported payment on the UPI framework and could be made directly from bank accounts. With this update, UPI QR codes can be scanned from digital wallets, too.

Who will be liable to pay these fees?

To be absolutely sure, the interchange fees will be applicable between a merchant (the business accepting the payment) and a wallet (such as Paytm or PhonePe). Based on the category, the merchant will be liable to pay this fee to a wallet operator, when transactions above Rs 2,000 are made on UPI through a wallet, and not directly from a bank account.

Does this affect business owners?

Small business owners, such as local kirana stores, will likely remain unaffected since there are no fees that apply for transactions below Rs 2,000. However, for those that accept larger UPI transactions, the interchange fee will become applicable if a user decides to make a large payment from their wallet, instead of directly from the bank account.

While this would create a marginal impact on merchants, the latter are likely to absorb this impact within their margins, instead of passing it down to customers. The latter is an unlikely scenario that will only happen if businesses face a major impact on their merchant discount rates (MDRs) for digital transactions, which is unlikely at the moment.

Will your wallet transactions become more expensive now?

No. As a user, you would not be paying anything more than what you are right now — both for making payments from your digital wallets, and for loading money into your wallets. The latter presently has a 15bps transaction fee for using UPI to transfer money to a wallet, which wallet operators will be required to pay to a bank for any bank-to-wallet transfer of over Rs 2,000. However, most wallet operators are likely to absorb this cost into their margins, and not have any impact on customer transactions.

How does it affect your UPI transactions?

The UPI interchange fee has no effect whatsoever on your usual UPI transactions, which you can continue with as usual. The introduction of interoperability between UPI and wallets means that you can now also use your wallets, such as your Paytm or PhonePe wallets, to make payments by scanning UPI QR codes — which adds a new ability to your online payment options.

Can it ever affect your UPI payments?

The union government has held steadfast that UPI transactions for users — be it for personal transfers or payments to businesses — will not accrue any transaction fee at any point, by virtue of UPI being labelled a ‘public good’. As long as this holds true, your direct bank-to-bank UPI transactions will continue to remain free — even if wallet operators and merchants start passing down the impact of these margins on to customers at some point in the future.