Digital payments that were limited to debit and credit cards have grown by leaps and bounds in the past decade. It's the generation of Gpay, Paytm and QR codes now.
The National Payments Corporation of India's (NPCI) latest circular has left a lot of consumers worried about how their transactions will be charged.
The circular stated that all UPI transactions made via prepaid instruments will attract an interchange fee of 1.1% for merchant payments above Rs 2,000 from April 1.
Onmanorama attempts to decode this announcement for you by explaining some of the technical terms here.
1. Unified Payments Interface (UPI)
UPI is an instant real-time payment system developed by the NPCI. It facilitates three types of transactions: P2P (Peer to Peer), P2M (Person to Merchant) and P2PM (for small merchants and unorganized retail sector).
A UPI number, which is a bank-verified phone number identifier of your UPI ID, allows you to receive money from users regardless of the app used.
2. Prepaid instruments
Facilities that allow fund transfers or payments against the value already stored in them are called prepaid instruments. Some examples include digital wallets, credit cards, vouchers, etc.
3. Interchange fee
The interchange fee is the charge that merchants pay to issuers of these services for every transaction.
4. Merchant payments
'Merchant services' is an umbrella term used to describe the services provided by banks that let businesses accept and process electronic payments.
Thus, the NPCI announcement simply implies that all your UPI transactions will be charged a percentage of the transaction amount if:
- Your amount is above Rs 2,000
- The transaction is a Person to the merchant (P2M) transaction
- It is from a prepaid instrument like your Paytm or PhonePe wallet, Amazon Pay
The charge will kick in when a customer having a wallet of one particular company makes a payment to a merchant, who has a wallet of another company. This levy was being introduced to help cover for the cost of interchange or interoperable between two wallets.
The charges applied would vary from 0.5% to 1.1% depending on the type of transaction. The interchange fee is 0.5% for fuel, education, agriculture and utility payments whereas it's 1.1% for convenience stores and retail outlets.
The decision of who the onus falls on depends on the merchants. If the merchants decide to pass on the higher cost to customers, the latter will bear the burden.
Paytm has already issued a clarification on the NPCI circular. It said that no Paytm customer will have to will pay any charges on making payments from UPI either from a bank account or PPI/Paytm Wallet
Now, NPCI is also charging prepaid payment instrument issuers 15 basis points for recharging a wallet with over Rs 2000. The customers would feel the pinch of this additional cost only if the wallet issuers decide to pass on the service fee.
Overall volume of transactions to be affected?
The move is likely to affect high-value transactions. According to NPCI, the share of the individual to merchants transactions above Rs 2,000 is only about 5 per cent of the total transactions in February.
Currently, the most preferred method of UPI transactions is linking the bank account in any UPI-enabled app for making payments. This contributes over 99.9 per cent of total UPI transactions. These bank account-to-account transactions continue to remain free for customers and merchants.
Medium-category shopkeepers, who fall under the P2M category, also stand to be affected in transactions above Rs 2000.
Revenue generation model
Speculations are rife that more banks will volunteer UPI service if a revenue generation model like this is put in place. It is also likely to give more incentives to the payment service providers like Paytm and PhonePe which are struggling to maintain profitability.