Payment Firms Revaluates Their Revenue Model As UPI Transactions Are Now Free

Major Payment Firms like Google Pay and Phone Pay are revaluating their revenue models as UPI transactions are now free. Google Pay has now introduced conveyance fees for mobile recharges which was earlier provided at free of cost. Paytm and PhonePe have already implemented charges for specific transactions. The conveyance fees levied ranges between Rs 1 and Rs 3. The charges are applicable to recharges of Rs 100 or more made through the app’s unified payment interface (UPI) service. This change in Google Pay’s policy follows a trend set by other payment service providers such as Paytm and PhonePe. Similar charges have been implemented by various online services for tasks like ordering food or booking movie tickets.

UPI Market Share

NPCI showed Phone Pe accounted for 46% of UPI transaction volume in October 2023, Google Pay for 36% and Paytm another 13 per cent. Collectively Phone Pe, Google Pay, and Paytm accounted for 94 per cent of UPI transactions by volume and 96 per cent by value in March 2023.

Why UPI transactions are Important in Today’s World

UPI is currently the most preferred and the most used payment system in India that allows users to transfer money from between bank accounts instantly using their mobile phones. The Prepaid Payment Instruments are digital wallets that allow users to store money and make payments. PhonePe, Google Pay and Paytm are PPIs of India. NPCI has now permitted the PPI wallet to be part of interoperable Unified Payment Ecosystem. The interchange charges introduced are only applicable for the PPI merchant transactions and there no charges for bank to bank based UPI transactions
In recent times, UPI has emerged as the preferred mode of digital payment by offering free, fast, secure and seamless experience. Traditionally, the most preferred method of UPI transactions is linking the bank account in any UPI-enabled app for making payments, which contribute over 99.9 per cent of total UPI transactions.
The volume of UPI transactions has increased manifold from 0.45 crore in January 2017 to 804 crore in January this year. The value of UPI transactions has increased from just ₹1,700 crore to ₹12.98 lakh crore during the same period.

Will Payment Firms Charge Users for UPI transactions??

The answer to this question is No. The users are unlikely to be charged for UPI transactions. The new charges introduced will be applicable to merchants who accepts payment over Rs 2000 using this Prepaid Payment Instruments such as mobile wallets.
UPI transactions are currently for smaller amounts. The NPCI believes incentivizing PPI providers is needed to promote UPI transactions for higher amounts. With this the average transaction value of UPI transactions can be increased, and the overall cost of payment systems in India might reduce. According to the NPCI, the proposed interchange fee is in line with the recommendations of the Committee on Payments and Market Infrastructures and the World Bank, which suggest an interchange fee of up to 1.15 per cent for UPI transactions.

What is Interchange Fee ?

An interchange fee can be described as the fee that is charged by the receiver bank/payment service provider to the merchant. It is levied to cover the costs of accepting, processing, and authorizing transactions. The charges are being introduced to increase revenue of banks and payment service providers who have been struggling with the high cost of UPI transactions.

What is PPI?

Prepaid payment instruments include mobile/payment wallets (such as Paytm Wallet, Amazon Pay Wallet, PhonePe Wallet), smart cards, stripe cards, paper vouchers, etc. With the use of of PPIs, a person can send and receive money without any physical exchange of cash or card.

How will this benefit the payment services providers such as Paytm, PhonePe, and Amazon Pay?

This decision is expected to bring in much-needed revenue for payment service providers, who have been struggling to maintain profitability due to the low-transaction fees on UPI transactions.

Which transactions will NOT attract NPCI’s interchange fees?

The interchange fee would not be applicable on peer-to-peer (P2P) and peer-to-peer-merchant (P2PM) transactions between a bank account and a PPI wallet. Therefore, no charges for normal customer transactions or the bank account to bank account-based UPI payments. NPCI in a tweet said: “UPI is free, fast, secure and seamless. Every month, over 8 billion transactions are processed free for customers and merchants using bank-accounts.”

NPCI proposal

The NPCI has clarified that the proposed interchange fee is in line with the recommendations of the Committee on Payments and Market Infrastructures and the World Bank, which suggest an interchange fee of up to 1.15 per cent for UPI transactions.
The fee now awaits the Reserve Bank of India’s (RBI) approval. If given a nod, the new fee structure will have a significant impact on PPI providers and merchants.
PPI providers may rejig their fee structures to account for the interchange fee, and merchants may face higher costs for accepting UPI payments.
Last year in August, the Union Finance Ministry clarified that UPI is a digital public good and that it was not considering levying any charges on transactions made through it. UPI is a digital public good with immense convenience for the public and productivity gains for the economy. There is no consideration in Govt to levy any charges for UPI services. The concerns of the service providers for cost recovery have to be met through other means.

Who will pay these charges?

For example, if a buyer is making a PPI payment via UPI (Paytm or Google Pay) at a store or online, and the QR code is that of PhonePe, then PhonePe will receive the applicable interchange fee from the merchant.
In the case of UPI transactions, the interchange fee is paid by the bank of the merchant (the person or business receiving the payment) to the bank of the payer (the person making the payment).

Why are Interchange fees necessary?

Transaction Processing: By charging interchange fees, payment networks can sustain the infrastructure to facilitate seamless electronic payments. Interchange fees cover the costs associated with processing credit and debit card transactions.
Risk Mitigation: Interchange fees also help mitigate the risks involved in card-based transactions. These fees contribute to funding robust security measures, advanced technologies, and monitoring systems that safeguard against unauthorized transactions, ensuring trust and reliability in the payment ecosystem.
Rewards and Benefits: Cashback programs, loyalty points, travel rewards, and other incentives are often funded by the interchange fees paid by merchants. These rewards not only attract consumers but also promote card usage and card acceptance, stimulating economic activity and driving customer loyalty.
Innovation and Technological Advancement: Interchange fees are vital in driving innovation within the payments industry. They enable the introduction of innovative payment solutions, improved transaction speed, enhanced security measures, and expanded acceptance networks, which benefit businesses and consumers.