Will UPI payments become expensive now? 

Not all UPI transactions will get more expensive now. If you have a fully KYC compliant digital wallet and with it, you use UPI to pay or transfer ₹2,000 or more to a merchant, then you may have to pay more for the transaction. 

But for now, the incidence is not on the user. If merchants decide to pass on the charges, then the above transactions will get expensive. 

What are the charges that have been introduced on UPI transactions?  

Two types of charges have been introduced — interchange fee and wallet loading charges. 

Interchange fee can vary from 0.5–1.1 per cent of the transaction and is payable by the retailer or merchant to the wallet provider. This is an extension of how debit or credit cards work. Visa and Master Card levy interchange fee to cover for the transaction risk, including credit risk and handling charges, or the cost of operating a digital payment network. 

This shouldn’t be confused with MDR or merchant discount rates. MDR is a fee charged to merchants by an acquiring entity (banks in case of cards). Interchange fees is paid to the issuing entity (or bank and wallets) by the acquirer or the merchant to compensate for risk of payment. For instance, Paytm Payments Bank, which is a wallet provider, will gain if it can receive income on the transaction. 

Second is the wallet loading charge, which is primarily intended to compensate banks for the loss of float or CASA income. If a user transfers money from Bank X to her Amazon Pay wallet, Amazon should pay a 0.15 per cent fee to Bank X, if the transfer is Rs 5,000 or more. 

However, the most significant step is permitting inter-operability between wallets. At present, if a user maintains a Paytm wallet, he cannot use the POS or QR of a PhonePe. From April 1, that will no longer be the case; just like credit cards, wallets can also be used irrespective of the QR issuer . 

Which entities will bear the incidence of the charges? 

Interchange fee would be borne by the merchant, and wallet loading fee by the wallet provider. 

What is the probability of these charges being passed on to customers? 

Reasonably high. With credit cards, sometimes, we encounter small vendors passing on or loading the interchange fee to the customer. If the customer refuses to bear the cost, cash is resorted to as the payment mode. That likelihood is possible even with UPI payments done through wallets. 

But merchants are already absorbing the cost of soundboxes (Rs 250 or more monthly, in addition to one-time charges payable to fintechs) since soundboxes offer safety and convenience of transactions. Large merchants may want to absorb these charges too. 

What proportion of UPI customers will be impacted if the additional cost is passed on? 

The proportion could be quite small. According to NPCI, payment transactions from one bank account to another account for 99.9 per cent of UPI transactions. Usually, wallets are loaded for ease of digital payments for frequent purchases such as online shopping, food ordering, or cab services. 

Why did NPCI introduce these charges? 

Perhaps to test the waters onthe outcome of a UPI user segment, if they are subjected to charges. businessline earlier this month reported that the proposal to charge UPI transactions may have been put in the back burner. While the larger thought process remains intact, industry experts say that with commercial viability of payments banks challenged, allowing them to charge an interchange fee could offer some relief, while getting a dipstick of consumer behaviour if they must pay for payments. 

Will this disincentivise merchants from offering POS? Can this impede growth of UPI in any way? 

Smaller merchants focusing on household needs like a furniture shop or a clothes shop, may not entertain use of wallets for UPI payments. They may not want to bear the cost of the transaction or opt to pass it to the customer. But given that it’s a minuscule segment using wallets for UPI transactions, it is unlikely to be counterproductive for the UPI ecosystem. 

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