According to the National Payments Corporation of India (NPCI), the interchange fee of up to 1.1% will be imposed on United Payments Interface (UPI) transactions carried out using prepaid payment instruments like wallets and cards for merchant payments from April 1, 2023. The interchange fee of the transaction value will be levied only on merchant payments of above Rs 2,000, and it will be applicable to UPI wallet top-ups as well. Therefore, you will have to bear the cost of the interchange fee if you make UPI payments using prepaid payment instruments for merchant payments of above Rs 2,000.
What is an Interchange Fee?
An interchange fee is a small percentage of the total amount of your transaction that's paid to the bank that issued your card. It's used to cover costs associated with processing your payment, such as network fees and fraud prevention.
The way it works is simple: when you make a purchase using UPI, both banks involved in the transaction (the sending bank and receiving bank) are charged an interchange fee by their respective banks. The receiving bank then passes this cost on to you through higher charges on your bill at the end of each month or year--that's why some people think they're paying more than they should be!
Who Pays the Interchange Fee?
The interchange fee is paid by the merchant to the bank that issued the card. The interchange fee varies depending on several factors, including:
The type of card (debit or credit)
Whether it was swiped or keyed in manually
How much volume you're processing through your business
What is the UPI Interchange Fee?
The UPI Interchange Fee is the amount that banks charge each other to process transactions. It's charged on top of the transaction fee charged by your bank to you and it's calculated as a percentage of total amount transferred.
The interchange fee can be applied to all types of transactions, including payments made from one bank account to another or even peer-to-peer transfers (like sending money from Paytm).
The interchange fees are not fixed by any regulator and are determined by individual banks themselves based on their agreement with other banks in their network.
How Does the UPI Interchange Fee Impact Consumers?
The UPI Interchange fee is a cost that is passed on to consumers, and it varies depending on the bank. However, most banks charge an interchange fee of 0.25% of the amount transacted. This means that if you transfer Rs 10 lakhs from one bank account to another through UPI, your bank will charge a fee of Rs 2500 (0.25% * 10 lakhs).
In addition to this, there are other costs associated with using UPI such as:
Merchant Discount Rate (MDR) - The MDR charged by banks varies widely across merchants but averages out at around 2% per transaction for debit cards and 4% per transaction for credit cards in India
How Does the UPI Interchange Fee Impact Merchants?
The UPI Interchange Fee impacts merchants in three ways: cost, availability and benefits.
Cost - The interchange fee is a cost that is passed on to you as part of the transaction fee charged by your bank or payment gateway. This means that if you are using a service provider such as Paytm, PhonePe or any other UPI enabled app then they will charge their own fees on top of what your bank charges for processing the transaction.
Availability - Some banks may not offer UPI services yet so it's important for merchants to check which banks their customers use before deciding whether or not they should enable UPI payments on their website or app
What Can Merchants Do to Minimize the Impact of the UPI Interchange Fee?
Negotiate. If your business is a large one, it's worth negotiating with the banks that provide UPI services to see if they can offer you a better deal.
Utilize UPI Services. If you don't want to negotiate, then consider using UPI services as much as possible so that the interchange fees are spread out over more transactions and therefore less impactful on each individual transaction.
Analyze Data and Adjust Pricing accordingly: If you're not able to negotiate or utilize UPI services in order to minimize the impact of these fees, analyze data related to your business' sales volume and costs associated with each sale (including interchange fees) over time; this will allow you an opportunity understand how changes in either could impact profitability going forward