Social Media Is Lying To You. UPI Payments Are Still Completely Free

The National Payments Corporation of India released a statement on Wednesday, reaffirming that payments made on the unified payments interface continue to remain free.

This came after considerable confusion over the last two days on social media platforms, with users speculating that the 1.1% interchange fees applied on UPI merchant payments conducted through prepaid payment instruments could lead to charges for customers. These charges will be applicable for transactions worth over Rs 2,000.

The obvious question most people will have now is what exactly are PPIs? As the name suggests, these are prepaid instruments which need to be loaded with funds before you can use them to make payments. So, mobile wallets, prepaid cards, gift cards, etc., all fall under the PPI title.

These are different from UPI apps where the transaction is conducted directly using funds from a bank account.

The NPCI, in its statement, said that 99.9% of all UPI payments happen through UPI apps. In February alone, there were 753 crore UPI transactions recorded across all participants, of which merchant transactions were at 415 crore.

Interchange Vs MDR

The core issue though is that speculators are conflating the interchange with merchant discount rate.

To understand this better, we must first understand what interchange exactly is. The most used definition is that it is a fee that a merchant acquiring bank pays an issuer bank in an electronic transaction. Does it make sense? Let's understand this better with an example.

Let's say you have a credit card issued by Bank A and you go to a restaurant which has a card machine from Bank B. When you swipe your card on this machine, Bank B pays Bank A a small percentage of the paid amount (within a pre-decided cap) for facilitating the payment. This small percentage is referred to as interchange.

Since this amount is exchanged between banks, neither the restaurant owner nor the card user needs to be concerned with it.

What the merchant and customer needs to think about is the MDR. In the above example, Bank B will charge the restaurant owner a small fee per transaction, or MDR, because it provided the card machine and a payments pipeline. The restaurant owner may or may not pass on this charge to you.

This very interchange will now be applied for UPI merchant transactions on PPIs. Typically, the interchange will make its way into the MDR as the merchant acquiring bank needs to make the transaction sustainable. However, according to the government's orders MDR cannot be applied on UPI payments. So this will not affect a merchant or customer, at least for now.