The National Payments Corporation of India (NPCI) announced on March 29, 2023, the introduction of an interchange fee for certain Unified Payments Interface (UPI) transactions. Effective April 1, 2023, Person-to-Merchant (P2M) payments exceeding Rs 2,000, made using Prepaid Payment Instruments (PPIs) such as digital wallets, will incur an interchange charge of up to 1.1% of the transaction value. This adjustment aims to contribute to the sustainability and growth of the payment ecosystem.

The newly introduced charge is an interchange fee, a common practice in the card payment industry. In this context, the merchant acquirer (the entity providing UPI payment acceptance infrastructure to the merchant) will pay the interchange fee to the PPI issuer (the entity that issued the digital wallet or other PPI). Importantly, direct bank account to bank account UPI transactions, which constitute a significant majority of UPI volumes, will continue to remain free for users. The NPCI clarified that customers will not be directly charged for linking their bank accounts to UPI or for making payments from their bank accounts.

This development applies specifically to transactions where the UPI payment is funded by a PPI, and not directly from a user's linked bank account. The Reserve Bank of India (RBI) had previously permitted the interoperability of PPIs with UPI, allowing users to link their digital wallets to their UPI IDs for transactions. The new interchange fee is designed to cover the operational costs and incentivize the development and usage of these payment instruments, particularly given the rising adoption of UPI for merchant payments.

Key details of the NPCI announcement include:

  • Effective Date: April 1, 2023
  • Transaction Type: Person-to-Merchant (P2M) payments
  • Payment Method: UPI transactions funded by Prepaid Payment Instruments (PPIs) like digital wallets
  • Threshold: Only payments exceeding Rs 2,000
  • Fee Rate: Capped at 1.1% of the transaction value for amounts above Rs 2,000
  • Fee Recipient: The PPI issuer receives the interchange fee from the merchant acquirer.
  • Exclusion: UPI transactions directly from a bank account to a bank account remain free for all users.
  • Specific Categories: Different interchange percentages have been outlined for various merchant categories, ranging from 0.5% for fuel and education to 1.1% for general merchants.

The government has consistently maintained that UPI payments, particularly those directly from bank accounts, should remain free for users. The current notification by NPCI aligns with this principle by ensuring that charges are not levied on bank account-linked UPI transactions. Instead, the interchange fee is introduced for transactions involving PPIs, shifting a portion of the transaction cost within the payment service provider network. Industry stakeholders are expected to monitor the impact of this change on merchant adoption, consumer behavior, and the overall growth trajectory of digital payments in India.