The National Payments Corporation of India (NPCI) has announced a new interchange fee for Unified Payments Interface (UPI) transactions made through Prepaid Payment Instruments (PPIs). The interchange fee is the amount paid by one bank to another bank for using their payment infrastructure. The new rule will apply from 1st April 2023 and will be reviewed by 30th September 2023. In this article, we will discuss the details of the new interchange fee for UPI transactions above Rs.2,000 made through PPIs.
What is an Interchange Fee?
An interchange fee is a fee paid by the acquiring bank to the issuing bank for every transaction using a payment card. The acquiring bank enables merchants to accept card payments while the issuing bank issues the payment card to the customer. The interchange fee is usually a percentage of the transaction amount and covers the cost of processing the transaction.
UPI Transfer Limits and Interchange Fees
Unified Payment Interface (UPI) has become one of the most popular methods of making digital payments in India. It is a real-time payment system that enables instant money transfers between bank accounts using a mobile device. However, users should be aware of certain limits and fees associated with UPI transactions.
UPI Transfer Limit per Day According to the National Payments Corporation of India (NPCI), the UPI transaction limit per day is Rs.1 lakh. However, for bill payments and merchants, the limit is Rs.5 lakh. The maximum UPI daily transfer limit may vary from bank to bank, ranging from Rs.25,000 to Rs.1 lakh. Some banks have also set limits per week or per month instead of per day. For example, IDFC bank allows up to Rs.1 lakh per week and Rs.30 lakh per month for UPI transactions.
Additional Costs of UPI Transactions: Surcharge and Interchange Fees Explained
When UPI transactions are made through Payment Instrument Providers (PPIs) such as wallets, interchange fees are imposed. These fees are similar to the merchant discount rate applicable to credit cards and are charged to cover the processing, accepting, and authorizing transaction costs. However, customers do not have to pay the interchange fee for UPI payments made through PPIs for peer-to-peer (P2P) and peer-to-merchant (P2M) transactions.
In UPI transactions, the interchange fees are transaction fees that the merchant must pay when a customer processes a transaction. For instance, when a customer makes a payment through UPI using a PhonePe QR code at a store, the merchant must pay the interchange fee to the payment service provider, i.e., PhonePe. The interchange fee is typically between 0.5% to 1.1%, depending on the service. For instance, an interchange fee of 0.5% is applicable on fuel payments, 0.7% for the post office, telecom, utilities, agriculture, and education, 0.9% for supermarket payments, and 1% for insurance, mutual funds, government, and railways.
NPCI’s New Interchange Fee for UPI Transactions
Recently, the NPCI recommended an interchange fee of up to 1.1% on UPI transactions above Rs.2,000 made through PPIs. This new rule will come into effect on 1 April 2023, and the interchange pricing will be reviewed by 30 September 2023. This update may impact merchants who use PPIs for UPI transactions, as they may have to pay higher interchange fees on transactions above Rs.2,000.
How does the UPI interchange fee affect customers making payments through wallets?
Customers do not have to worry about paying the interchange fee on UPI payments made through PPIs for peer-to-peer (P2P) and peer-to-merchant (P2M) transactions. When a customer makes a payment through UPI, the payer bank charges an interchange fee to the merchant bank for processing the transaction. The merchant bank then pays the interchange fee to the payer bank.
The good news is that customers or users do not have to pay interchange fees for UPI payments when the UPI is linked to a bank. The interchange fees only apply to PPI merchant transactions. In other words, the fees are paid by the merchants, not the customers.
If a customer makes a payment through UPI to family, friends, other individuals, or the merchant’s bank account, they will not have to worry about paying the interchange fee. However, merchants will pay the interchange fee when the UPI is linked to the wallet.
It is essential to note that the NPCI has recommended an interchange fee of up to 1.1% on UPI transactions above Rs.2,000 made through PPIs. This new rule will apply from 1st April 2023. The interchange pricing will be reviewed by 30th September 2023.
In addition, the NPCI has asked the PPI issuers to pay 15 basis points as wallet-loading service charges to the remitter banks for recharging wallets with over Rs.2,000. For instance, if you recharge your PhonePe wallet with more than Rs.2,000, PhonePe will pay a wallet-loading service charge of 0.15% to your bank. This means that you will not have to pay any additional fee to recharge your wallet to make UPI transactions.
Who will pay the interchange fees?
Interchange fees are charged by card issuers or wallets, which are typically paid by merchants. For medium-category shopkeepers, these fees only apply to transactions above Rs.2,000. For high-value transactions, merchants have the option to either absorb the additional costs or pass them on to the customers.
The NPCI has instructed PPI issuers to pay a service charge of 15 basis points to remitter banks for loading wallets with more than Rs.2,000. For example, if you recharge your PhonePe wallet with more than Rs.2,000, PhonePe will pay a wallet-loading service charge of 0.15% to your bank.
In simpler terms, customers will not have to pay any extra fees to recharge their wallets to perform UPI transactions.
Impact of the New Interchange Fee
The new interchange fee is expected to impact PPI issuers, acquiring banks, and merchants. PPI issuers will now have to pay an interchange fee to acquire banks for UPI transactions above Rs.2,000 made through PPIs. Acquiring banks may pass on this fee to merchants, who may, in turn, pass it on to customers. This may lead to an increase in customers’ transaction costs.
Benefits of the New Interchange Fee
The NPCI has introduced a new interchange fee to encourage the use of UPI transactions for higher amounts and to promote the adoption of digital payments. The new fee structure is expected to incentivize PPI issuers to promote UPI transactions above Rs.2,000. This will help reduce the use of cash and promote digital payments, which is a key objective of the government’s Digital India initiative.
