The waiver of merchant fees on UPI accelerated adoption during Covid, but growth slowed.

The waiver of merchant fees on UPI accelerated adoption during Covid, but growth slowed. In an interview with TOI, Dilip Asbe, MD & CEO, explains how the new fee structure protects small transactions while charging larger merchants, who already pay fees on card payments. Besides, there are a host of exemptions aimed at shielding consumers and small merchants. NPCI expects Rs 13,000-15,000 crore in the first year, with 5% of this being ploughed back to support small merchants, while periodic reviews will assess the model.Why this sudden move to charge MDR on UPI, and how did you decide on the Rs 2,000 threshold and the 0.4% MDR? Will you review the scheme periodically?UPI P2M was charged from inception, and we followed the global model of keeping P2P free and P2M at reasonable cost recovery, much lower than the prescribed MDR for debit and credit cards, net banking or wallets. The government’s decision on zero MDR in 2020 helped UPI expand rapidly among merchants during the Covid period. In the last four years, the UPI ecosystem — namely NPCI, banks, fintech start-ups and industry bodies such as the Payments Council of India and IBA — has been seeking a review to ensure a self-sustainable system that can create long-term value for the country, citizens and merchants. UPI growth has slowed, and India remains under-penetrated compared with China and Brazil, where almost 90% of the adult population uses digital payments every day, versus 40% in our case. So, we need investment to expand digital payments, especially among the poor.The charges were finalised primarily keeping in mind the costs incurred by various players to process UPI transactions. Instead of a fixed-fee model, which would penalise low-ticket transactions, we opted for percentage-based charges so that high-ticket transactions with margins can contribute the majority of the MDR. Certain categories with high ticket sizes but lower margins were kept at a flat Rs 5 irrespective of the ticket size, to continue driving adoption. If you review the rates, they are almost at par with global rates for QR-based payments, which are charged similarly without making any exceptions, while these charges remain much lower than those for debit or credit card transactions currently paid by large merchants.How much is expected to be collected in the first year, around Rs 15,000 crore?It may take some time for the system to settle down. Maybe, in the first year, we will collect Rs 13,000-15,000 crore, of which 5% will be allocated to the small merchant fund to incentivise digital-payment growth among small merchants. We will soon release the guidelines on this.What is the rationale for the charge given that the government can easily foot a bill of Rs 20,000 crore, as it is a tiny fraction of its budget, especially when it spends thousands of crores on non-merit subsidies? Why can’t banks, NPCI or RBI bear the burden?The idea is not to burden small players, as we expect over 80% of the MDR charges to come from businesses with over Rs 1,000 crore turnover. Most of them are already accepting cards and paying much higher MDR on cards under the current construct. There are competing demands on public funds, and this is the best way to make the ecosystem sustainable, grow and innovate without depending on subsidies.NPCI is a not-for-profit entity; all its profits are reinvested in creating infrastructure, reserves for settlement guarantees, innovation and resilience. NPCI needs to not only survive but thrive for the next 100 years.Banks continue to make substantial investments in maintaining and scaling the UPI ecosystem, with annual expenditure often exceeding Rs 2,000 crore for most large banks. At the same time, a Rs 5,000 cash withdrawal can often be substituted by 50 to 100 UPI transactions, highlighting the scale and efficiency of digital payments. While the transition from cash to digital payments has undoubtedly delivered savings through lower cash-handling and ATM-servicing costs, banks also incur significant costs in building and operating resilient, secure and scalable UPI payment infrastructure.Over the last six years, the overall ecosystem has invested over Rs 75,000 crore to maintain and grow the UPI ecosystem without much cost recovery. These investments and innovations will benefit the country in the long run.What is being done to ensure that customers are not burdened with MDR? Also, is NPCI proposing a relook at GST?Running the UPI ecosystem requires around Rs 21,000 crore annually, and we have sought to protect small merchants and low-value payments to help smaller firms raise capital and invest. The idea is also to have more players to increase competition. As a result, person-to-person transactions and merchant payments up to Rs 2,000, with no upper cap on cumulative or repeat transactions, all recurring payments or AutoPay, and small individual merchants receiving up to Rs 1 lakh a month into their own accounts will not face any MDR. Since most of the MDR will be generated from merchants who already accept card payments, the consumer price is already factored into MDR charges, or else we would have seen merchants offering major discounts for UPI and RuPay debit card transactions over the last six years. We have prohibited platform fees and merchants charging customers. We plan to review it periodically along with the ecosystem. On GST, I have no comments to offer since this decision will be made by the finance ministry and GST Council. However, major large merchants will claim an input tax credit for the GST paid.How do you propose to utilise the money to develop the market? Do you see banks and other service providers offering loyalty points for UPI transactions, as is the case with credit cards?The objective of these charges is to ensure the ecosystem thrives, becomes self-sustainable, and is able to innovate and create value that, in turn, grows UPI. Today, we observe that payment methods with good cost recovery tend to have better innovation and features. For example, EMIs, rewards and discount offers help grow merchant sales, particularly in categories such as electronics. Once cost recovery starts, the ecosystem will create a major drive to onboard new consumers and merchants, install more sound boxes and increase activity in under-penetrated geographies and categories through digitalisation. Amid evolving times and landscapes, it will also allow the ecosystem to invest proactively in cybersecurity and resilience.Will there be a check on merchants and consumers splitting transactions to avoid MDR over Rs 2,000?Any policy that has a ceiling or a floor has these second-order effects. If the consumer is ready to participate in splitting the transactions based on a merchant’s request, we do not foresee any harm in this and, accordingly, no upper cap on such transactions has been defined. We believe this may, at best, be a short-term phenomenon and that consumer experience will ultimately win in the long run. What we have seen globally and in India is that it is primarily the consumer’s choice that drives digital payments.The new system has created confusion around several aspects of the scheme…Yes, but we are working with industry bodies and ecosystem participants to provide clarity. For example, some people have interpreted the no-MDR limit below Rs 2,000 as a daily cap and not a per-transaction limit, which is not the case.How do you respond to allegations that the decision was taken under US pressure?The USTR has a reference to a UPI market-share cap of 30%, as well as NCMC standards access to other competing international schemes, which is a fair and factual point, and we believe it must be a country’s prerogative to make that decision. We didn’t find any reference to charges or MDR, and, as I said above, it benefits competing companies to keep it free.