UPI Interchange Fee: Small Businesses May Reconsider PPI-Based Payments

Indian small businesses are evaluating their digital payment strategies following the implementation of a new interchange fee on certain UPI transactions. Effective April 1, 2023, a charge of 1.1% has been introduced for UPI payments made using Prepaid Payment Instruments (PPIs), such as digital wallets, where the transaction value is above ₹2,000. This move by the National Payments Corporation of India (NPCI) aims to cover the costs incurred by PPI issuers, but raises concerns for merchants.

Understanding the New Fee

It's important to clarify that this new charge is an 'interchange fee' and not the traditional Merchant Discount Rate (MDR) that typically applies to credit or debit card transactions. For UPI, transactions made directly from a customer's bank account to a merchant's bank account (using their UPI ID or QR code) continue to remain free for both users and merchants. The 1.1% fee specifically targets transactions where the payment originates from a PPI, like a Paytm Wallet or PhonePe Wallet, and the amount transferred exceeds ₹2,000.

Who Pays and What It Means for Businesses

Under this new structure, when a customer uses their wallet to pay a merchant via UPI for an amount greater than ₹2,000, the merchant's bank (the acquiring bank) will pay the 1.1% fee to the customer's wallet issuer (the PPI issuer). While the fee is technically paid by the acquiring bank, it can potentially be passed on to the merchant. For small businesses, particularly those with thin profit margins, absorbing this 1.1% fee on larger transactions could erode their earnings, prompting them to consider discouraging wallet-based UPI payments or even passing the cost on to consumers.

The NPCI, which operates the UPI platform, has stated that the interchange fee is crucial for the sustainable growth and development of the digital payments ecosystem, particularly for PPIs which involve additional infrastructure and operational costs. However, the introduction has sparked a debate on how it balances the convenience of digital payments with the financial viability for small and micro-enterprises across India.

Impact on Consumers

For consumers, directly paying from their bank account via UPI remains free, offering an unaffected alternative. However, if a consumer prefers using a wallet for payments over ₹2,000, they might encounter situations where merchants prefer other payment methods or even levy an additional charge to cover the new fee. This could potentially alter payment behaviors, with users shifting back to direct bank-to-bank UPI transfers or cash for larger transactions.

The core promise of UPI was to simplify and democratize digital payments. While the new interchange fee only applies to a specific segment of UPI transactions, its implications for small businesses and the broader digital payment adoption landscape will be closely watched. Businesses are advised to understand these changes and adapt their payment acceptance strategies accordingly to maintain profitability while continuing to offer convenient payment options to their customers.

This report is for informational purposes only and should not be considered financial advice. Readers are advised to conduct their own due diligence.