UPI Transactions Interchange Fee [UPSC Current Affairs]

NPCI, in March 2023, notified that UPI transactions of over Rs. 2000 will attract an interchange fee of up to 1.1%. In this article, you can read all about this development and understand what transactions will attract the fee. This topic is important for the UPSC exam economy segment.

UPI transactions of over Rs. 2000 will attract an interchange Fee

As per the recent circular of the National Payments Corporation of India (NPCI), from 1st April 2023, an interchange fee of up to 1.1% will be levied on certain UPI transactions made using prepaid payment instruments (PPI).

• Interchange fee will be applicable on transactions of Rs. 2000 and above made to online merchants, large merchants, and small offline merchants.
• A ‘wallet loading service charge’ of 15 basis points will be required to be paid by the PPI issuers to the remitter bank for loading over ₹2,000 in the prepaid wallet.
• By September 30, 2023, NPCI will review the interchange pricing.

What is an Interchange Fee?

Interchange fee is the transaction fee paid by the merchant when a customer carries out a transaction.

• For example, if you are making a prepaid payment using UPI through a PhonePe QR code, the merchant is supposed to pay the interchange fee to the payment service provider (PhonePe in this case).
• Based on the merchant category, the interchange fee will vary from 0.5% to 1.1%
  • Categories such as education, agriculture and utility payments will attract an interchange fee of 0.5%.
  • Categories such as retail outlets and convenience stores will have an interchange fee of 1.1%.

Who has to pay the interchange fee?

• Transactions of above Rs. 2000 made using prepaid payment instruments will attract interchange fees.
  • Prepaid payment instruments are the instruments which allow the purchase of goods, services and remittances against the value stored in them. Wallets, vouchers, smart cards, and magnetised chips are examples of prepaid payment instruments. Paytm wallet, Amazon pay, PhonePe wallet, etc. are examples of wallets.

Who doesn’t have to pay the interchange fee?

• Peer-to-peer (P2P) transactions
  • It includes normal UPI payments done from one bank to another
• Peer-to-peer-merchant (P2PM) transactions between a bank and prepaid wallet
  • It refers to the categorization by NPCI of small businesses with an anticipated monthly UPI transaction inflow of Rs 50,000 or less.

Impact of the introduction of interchange fee

• As the interchange fee does not apply to small shopkeepers, they won’t be impacted.
• Medium-category shopkeepers will have to bear the cost of transactions above Rs. 2000.
• This move will impact high-value transactions the most.
• Consumers will be impacted if the merchant decides to pass on the higher cost to them.
• There can also be some friction at the merchant’s end in providing a UPI mode of payment, thus limiting its usage.
• Due to the lower transaction fee on UPI transactions, payment service providers were struggling to maintain profitability. And this reform will bring more revenue for the payment service providers.

UPI Transactions Interchange Fee- Download PDF Here