Regulatory changes lead to interchange fee for prepaid payment instrument-based UPI transactions in India

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The National Payments Corporation of India (NPCI), in March 2023, announced the introduction of Interchange on UPI transactions via prepaid payment instruments (PPIs), a move that is expected to have a significant impact on the digital payments market in India. This regulatory change is a positive development for the digital payments industry in India and is expected to improve competition, increase profitability for PPIs, and ultimately benefit customers by providing them with more innovative and user-friendly services.

• On March 24^th, NPCI issued a circular stating that PPI transactions made through the Unified Payments Interface (UPI) to merchants, with a value exceeding INR 2,000, will now be subject to a 1.1% interchange fee. Effective April 1^st, the circular also noted that that the new regulation for transactions exceeding INR 2,000 will not apply to peer-to-peer (P2P) and peer-to-peer-merchants (P2PM) transactions.
• Merely online merchants, big merchants, and small offline merchants will be subject to the interchange fee, whereas other transactions will remain unaffected. Although the 1.1% interchange fee is applicable across the board, specific merchant types will be eligible for a reduced interchange fee. For instance, if a prepaid instrument is used to make UPI payments to fuel service stations, the interchange fee applicable will be 0.5%.

The circular issued by the NPCI has also allowed the PPIs, including PPI wallets, to be part of an interoperable UPI ecosystem. The complete interoperability of KYC wallets across all UPI merchants is a crucial stride towards fostering the expansion of digital payments ecosystem. Furthermore, the interoperability are expected to make PPI wallets more appealing to consumers by opening up newer cases of payments. It will also eliminate the need for carrying multiple cards.

For merchants, the implementation of interoperability will considerably simplify payment collection by enabling them to accept wallet payments irrespective of the wallet being used by the consumer. This will remove the need for specific integrations with a particular wallet to accept payments on the merchant-side. As a result, the payment alternatives available for customers will increase. Consequently, PayNXT360 expects the interoperability of wallets with UPI to aid the strong growth of digital payments market in India from the short to medium-term perspective. 

This regulatory guidelines by NPCI, on interchange fee, is expected to benefit PPIs such as Paytm and PhonePe. These providers will now be able to charge an interchange fee for their UPI transactions. Previously, these PPIs were not allowed to charge an interchange fee for their UPI transactions, which meant that they had to rely on other sources of revenue such as advertising or transaction fees. Now, with the introduction of Interchange on UPI transactions via PPIs, they will have an additional revenue stream which will help them to improve their profitability.

• In March 2023, following the announcement from NPCI, Paytm Payments Bank announced that it would allow full KYC wallet customers to make payments to any online merchant accepting UPI. This development is projected to drive additional revenue for Paytm Payments Bank, as it is one of the the largest issuer of KYC wallets in India.

While Paytm stands to gain the most from the 1.1% interchange fee, due to its higher market share in the PPI wallet space, Paytm Payments Bank will also have to pay higher wallet-loading charges. Under the new guidelines issued by NPCI, PPI wallet providers will have to pay 15 basis points to the remitter bank for transactions above INR 2,000 done via UPI. These charges were zero until now. Notably, the wallet loading charges are estimated to run into several millions for wallet issuers such as Paytm.

The introduction of interchange fee is also expected to drive the competitive landscape in the Indian digital payment ecosystem. The additional revenue stream will enable PPIs to compete more effectively with traditional banks. The increase in revenue will benefit customers, as PPIs will be able to invest more in improving their services and offering more innovative products to their users. This will ultimately lead to a better user experience for consumers, leading to higher adoption of digital payment services across India.

To know more and gain a deeper understanding of the prepaid card market in India, click here.