Interchange On UPI Payments Via Prepaid Tools Will Push Interoperability, Competition

Starting in April, UPI payments over Rs 2,000 made via prepaid instruments— such as wallets or cards— will carry an interchange fee of 1.1%.

The fee will be applicable on person-to-merchant transactions and not on person-to-person transactions, according to a March 24 circular from the National Payments Corp. of India.

"The interchange charges introduced are only applicable for the PPI merchant transactions and there is no charge to customers," NPCI said in a statement on Wednesday. There are also no charges for the bank account to bank account based UPI payments, it said.

Interchange fee is typically associated with card payments and accounts for the cost of accepting, processing and authorising transactions. In the case of UPI payments made via PPIs, the interchange fee will be borne by payment system participants.

"From now on, [Paytm Payments Bank] will earn 1.1% interchange revenue when Paytm Wallet customers (i.e., the KYC wallets issued by Paytm Payments Bank) make payment on merchants acquired by other payment aggregators or banks," Paytm said in an exchange filing on Monday.

While 1.1% is the blanket interchange introduced by the NPCI, some categories of transactions, such as telecom or agriculture, will attract an interchange fee of 0.70%.

The introduction of interchange fees on such payments comes days ahead of the March 31 deadline to make Know-Your-Customer compliant prepaid wallets fully interoperable on UPI. This would allow users to scan any UPI QR code to pay using prepaid wallets, instead of being limited to using a QR code from the same issuer as their prepaid instrument.

"This is a step in the right direction to make the UPI pricing market-driven and competitive to incentivise the UPI players to recover costs and make additional investments as required," Mihir Gandhi, partner and leader of payment transformation at PwC India, told BQ Prime. The interoperability among PPIs via UPI will also make PPIs more attractive for other use cases, Gandhi said.

The introduction of interchange fee for such payments is also an incentive offered to the industry to ensure interoperability, the founder of a fintech startup which works with PPI issuers, told BQ Prime on the condition of anonymity.

The merchant discount rate— a fee charged for the processing of debit cards and credit cards— varies by issuer, but the Reserve Bank of India has capped the MDR charged on debit card transactions in the range of 0.40% to 0.90% of the transaction value since January 2018. The interchange fee is a component of the MDR for card payments, which varies according to the card network.

While the blanket interchange fee introduced on UPI payments via PPI is higher than debit cards, there may be some harmonisation in the future, the founder quoted above said.

"The interchange fee is necessary to create a level-playing field among card issuers," Vivek Iyer, partner and national leader for financial services at Grant Thornton Bharat, told BQ Prime. Ensuring interoperability of PPI payments on UPI rails is also among the obvious objectives behind introducing the fee, Iyer said.

The fee is set to come into effect starting April 1, 2023, according to NPCI's circular. The fees will also be reviewed on or before Sept. 30, 2023, the circular said.