The National Payments Corporation of India (NPCI) has introduced interchange fees of up to 1.1 per cent on merchant UPI transactions done using prepaid payment instruments from April 1.

The charge, starting from 0.5 per cent depending on the MCC (merchant category code), will be levied on UPI payments of over ₹2,000 made to online merchants, large merchants and small offline merchants. businessline took a look at what it means for merchants, payment players and customers.


Who will the new norms be applicable for?

The new NPCI guidelines on wallet interoperability establish interchange fee for wallet usage, which will be paid to issuers of wallets such as Paytm, PhonePe and Google Pay, among others. They also include charges for UPI-wallet-loading that will be paid by wallet issuers to remitter banks or the bank accounts from which the amount is being debited.


How will this benefit wallet players?

The inter-operability norms will enable universal acceptance of wallets across all UPI QR codes and devices, thus increasing the salience or relevance of wallets. It will also ensure uniformity and parity by clearly defining the interchange fees on wallet payments as against the current practice of bilateral agreements between wallet issuers and payment platforms.


How much are the interchange fees?

The interchange rates vary according to merchant category codes, in the range of 0.5 per cent to 1.1 per cent. Categories such as fuel, education, agriculture and utility payments attract a lower interchange of 0.5-0.7 per cent; convenience stories across food shops, specialty retail outlets and contractors, have the highest charge of 1.1 per cent.


Will customers benefit from this move?

The norms are expected to increase the appeal, scope, role and usability of wallets as they can now be used to make UPI payments across QR codes and devices, increasing payments alternatives for customers. As such, wallets are more convenient than UPI transactions owing to the facility of being able to load the wallet once to make multiple transactions rather than UPI code for every individual payment. Consumers will also be able to load their wallets from anywhere including credit or debit cards, BNPL (Buy Now Pay Later) and net banking, among others, thus creating a mechanism to use any instruments for UPI transactions, albeit directly or indirectly.


Will this make wallet transactions costlier?

The interchange fees are paid by merchants to wallets or card issuers and are usually absorbed by merchants. Smaller merchants and shopkeepers are unlikely to be impacted as it is applicable only on payments of over ₹2,000. However, MDR (merchant discount rate or merchant transaction fees) is applicable on wallets-on-UPI in certain cases and this move may lead to higher MDRs imposed on merchants, depending on payment companies’ ability and willingness to pass on the interchange. This may subsequently impact merchants’ ability to absorb the higher costs which could ultimately be passed on to customers.


Does this mean consumers will be charged for UPI transactions?

Currently, MDR for bank-to-bank UPI transactions is zero. Introduction of MDRs on all UPI merchant (P2M) transactions seems unlikely at the moment as the government has maintained that UPI is a ‘public good’ and that it does not plan to introduce charges on UPI transactions. However, loading of wallets for UPI transactions could cost more if wallet issuers decide to pass on the 15 bps interchange required to be paid to remitter banks for loads of over ₹2,000.