The National Payments Corporation of India (NPCI) has declared that from April 1, 2023, any Unified Payments Interface (UPI) transaction of more than ₹2,000 made via prepaid payment instruments (PPI) such as pre-loaded gift cards or online wallets will incur an interchange fee of up to 1.1%.
This caused a lot of confusion about whether consumers have to pay them. Are UPI payments getting more expensive? Today, in this blog, we have answered all your questions.
What are Prepaid Payment Instruments (PPI)?
With prepaid payment instruments (PPIs), you can purchase goods and services, as well as transfer funds using the value stored on the instrument. There are different PPIs, including smart cards, magnetic stripe cards, internet wallets, digital wallets, mobile wallets, mobile accounts, paper vouchers, and any such instrument that you can use to access the prepaid amount. The RBI regulates the PPI sector, and according to the RBI regulations, there are three types of PPIs:
- Closed-system payment instruments
- Semi-closed system payment instruments
- Open-system payment instruments (multipurpose cards)
Closed-system payment instruments
These are instruments issued by an entity or person to facilitate the purchase of goods and services from them – for example, bonus points issued by web portals for online shopping/purchases. These instruments don’t permit redemption or cash withdrawal. Also, you can’t use these instruments for payments and settlement for third-party services; therefore, these PPI aren’t classified as payment systems. The implication is that no RBI approval is required for issuing closed-system payment instruments.
Semi-closed system payment instruments
Semi-closed system payment can be used to buy goods and services at a group of clearly specified merchant establishments/locations. Paytm wallet is an example of such an instrument. These PPIs can be used for third-party purchase settlements, but a specific contract is required between the merchant and the issuer. Still, the holder cannot use them for redemption or cash withdrawal. Also, KYC norms are needed for higher payments.
Open-system payment instruments (multipurpose cards)
You can use these payment instruments at any card-accepting merchant location (point of sale terminals) to purchase goods and services, as well as withdraw cash from ATMs or banks. An important feature of these PPIs is that you can use them for limited cash withdrawals and cash transfers. Only banks can issue these PPIs. Only banks can issue these PPIs. Vodafone mPesa is an example of an open-system payment instrument.
What is an Interchange Fee, and Where is it Applicable?
An interchange fee is a charge that merchants need to pay when a consumer transacts using a digital payment mode. Usually, the interchange fee is borne by the merchant.
The NPCI has clearly mentioned in its statement that interchange fees are only applicable for PPI merchant transactions above ₹2000. These charges are not levied to the customer currently and will be borne by the PPI issuer. In the future, there is a possibility that the fees are passed on to the customers or merchants.
Additionally, there are no interchange fees for bank-to-bank UPI payments. (i.e.normal UPI payments).
So, in simple terms:
Case 1
Suppose you go to a grocery store and pick up ₹3000 worth of groceries. At the checkout counter, you decide to make the payment via UPI. In this scenario, the entire ₹3000 payment will be credited to the merchant’s bank account without any deductions. Thus, the merchant will receive the full amount you paid for the groceries, and you won’t have to pay any additional fees for payment via UPI.
Case 2
You want to buy groceries worth ₹3000 from a merchant and use your Paytm wallet for payment via a UPI transaction. The charge for this transaction would be ₹33 (i.e., 1.1% of ₹3000). However, you won’t have to pay this particular fee today. Instead, Paytm will pay the fee to the remitter bank (the bank that issued your digital wallet).
Do Consumers Have to Pay Charges?
No, you don’t need to pay additional fees on UPI transactions as a consumer today. The interchange fees will be paid by the wallet issuer (PhonePe, Paytm, etc.) to the merchant. Therefore, a customer has nothing to worry about regarding the UPI Interchange fee.
Final Words
It seems like the Indian Government wants merchants to receive the money directly in their bank account, using Bank to Bank UPI transactions instead of storing their money on wallet apps. Also, this will prevent wallet apps from holding large sums of money. With this new circular, even merchants won’t be motivated to keep their money in these wallet apps.
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