The National Payments Corporation of India (NPCI) has recommended an interchange fee on Unified Payments Interface (UPI) transactions of over Rs 2,000 made through Prepaid Payment Instruments (PPIs). The NPCI has proposed an interchange fee of up to 1.1 per cent and the move is aimed at increasing revenue for banks and payment service providers, who have been struggling with the high cost of UPI transactions. The interchange pricing will be reviewed by September 30, 2023.

UPI is currently the most preferred and the most used payment system in India that allows users to transfer money between bank accounts instantly using their mobile phones. The PPIs, on the other hand, are digital wallets that allow users to store money and make payments. There are a couple of PPIs in India, including Paytm, PhonePe, and Google Pay. An interchange fee is a fee that is charged by one bank to another bank for processing a transaction. In the case of UPI transactions, the interchange fee is paid by the bank of the merchant (the person or business receiving the payment) to the bank of the payer (the person making the payment).

So, does this mean that the users will be charged for UPI transactions? The answer is no. The users will not face the brunt of NPCI's new order. The new fee on UPI transactions will only be applicable to merchants who accept payments over Rs 2,000 using prepaid payment instruments (PPIs) such as mobile wallets. Individual users making personal transactions using UPI will not be charged any additional fees.

Currently, most UPI transactions are for smaller amounts. The NPCI believes that by incentivizing PPI providers to promote UPI transactions for higher amounts, the average transaction value of UPI transactions can be increased, and the overall cost of payment systems in India can be reduced.

According to the NPCI, the proposed interchange fee is in line with the recommendations of the Committee on Payments and Market Infrastructures and the World Bank, which suggest an interchange fee of up to 1.15 per cent for UPI transactions.

However, the decision has not been made yet, it will be taken by the Reserve Bank of India (RBI), which regulates payment systems in India. The NPCI has submitted its proposal to the RBI, and it remains to be seen whether the RBI will approve the recommendation.

If the recommendation is approved, it could have a significant impact on PPI providers and merchants. PPI providers may need to adjust their fee structures to account for the interchange fee, and merchants may face higher costs for accepting UPI payments. However, the NPCI believes that the long-term benefits of promoting higher-value UPI transactions will outweigh the short-term costs.