Sanjiv Nadkarni
UPI- a digital payment system endeared whole population of our country beyond imagination. When it was introduced in 2020 by the National Payments Corporation of India (NPCI), there were skeptics who doubted if digitally less literate sections like a kirana shop owner or a road side vegetable vendor would be part of such a system.
True to its name Unified Payment Interface, it unified almost everyone. It is called unified as it brings together or inter operates across all banks and variety of Apps. You can receive payment without exposing your bank account details in stark contrast to age old cheque system where payer needs to know payee’s bank and branch, IFSC code and account number. You then visit the bank, fill in paying slip and wait for 3 days for payment to happen. Looks so archaic today! In UPI you just need to know payee’s phone number or ID and payment happens instantly without requiring bank details. Sounds so magical. It is this simplicity that made UPI extremely popular. On top of this, it has been a free service until now.
Just recently the government announced a fee and a system that was working quietly and efficiently stirred entire nation. Before we discuss more about the fee, who pays, who gets benefitted etc we need to understand how UPI works,
Process involves payer, payer’s bank known as issuer bank, payee or receiver of payment, payee’s bank known as Acquiring Bank, App providers and an Intermediary which is NPCI.
Process starts with a user needing a UPI App like Google Pay, Paytm or bank’s App. He registers by linking his bank account and gets a unique virtual payment address (VPA), like user@bankname, which serves as his UPI ID.
When a user wants to make a payment, he can do so by selecting the payee’s UPI ID, scanning a QR code, or entering phone number that payee shares with him. To authorize transaction, user needs to enter his UPI PIN created during registration.
Once UPI PIN is entered, the app sends the payment request to his Payment App Provider (TPAP) like Gpay. TPAP sends request to Preferred Service Provider (PSP) like NPCI that oversees UPI system. NPCI contacts issuer bank for authentication of payee, balance etc and then initiates a debit in payer’s account, communicates a credit to acquiring bank and informs TPAP who sends successful message with transaction reference ID to payer’s App. Payee also gets notified in his App.
Funds are settled between banks within a short time frame, usually within a few hours, while users see transactions reflected in their accounts immediately. As a safety measure UPI limit is often set as Rs 1 lakh per day with other limits like 20 transactions a day.
In above example a payer initiates payment. This is called PUSH transaction. We periodically pay electricity, water, phone, credit card bills and various subscriptions to TV, music Apps etc. We have to do these payments for years. Many users simply give standing instructions to these services for auto payment. This can be done through UPI. In that case payee will initiate a payment which is called PULL transaction.
You will now understand elaborate system at work in the background and technicalities involved. Such a system needs regular maintenance and upgrades to bring new features to users. There are costs involved which are borne by App providers (TPAPs), issuing/ acquiring banks, NPCI etc. and therefore government has initiated a fee for UPI system which will be shared among these stakeholders.
Informal transactions from one person to another (P2P) will be free as they are now. Other transactions which are commercial in nature like payment against a purchase known as person to merchant (P2M) will be free up to Rs 2000 and then will have a fee of 0.4% with a cap of Rs 300. This is to be paid by receiver or the merchant. There is a catch here. If a kirana store has all transactions within Rs 2000 but monthly business crosses Rs one lakh then he will have to pay a fee of 0.4% on total. There are other categories of transactions like fuel purchase where fee will be flat Rs 5 above purchase of Rs 2000.
For every Rs 2000 received, merchant will have to pay fee of Rs 8 to Rs 3.20 will go to issuing bank, Rs 2.40 to acquiring bank while TPAPs like Gpay will get Rs 1.60 and NPCI 80 paise. Annual collection is expected to be around Rs 2,300 crore to be shared and may grow 22% or so annually.
Let’s have a look at volumes involved. Nearly 2500 crore transactions are happening monthly (which is nearly 9000 transactions every second) with total value of about Rs 30 lakh crore of which 70% in value terms are P2P type and will be free. This leaves Rs 9 L crore in P2M category of which 5% or Rs 4500 crores will be chargeable at 0.4% as they cross Rs 2000 threshold.
Compare this with debit and credit card spending. They touch about Rs 2.4 lakh crore a month. Value of ATM cash withdrawals is about Rs 2.3 lakh crore a month. Cards and cash transactions together are less than 20 per cent of UPI value. This should make us feel proud that India has developed a formidable digital payment system.
Naturally UPI has put card payments under severe pressure. Cards charge merchants a fee between one per cent and 2.5 per cent on all transactions. This is the reason why most small merchants have stopped accepting cards. Many are passing fee to customers and get away as consumers find it difficult to produce evidence against such practices,
While it is not a bad idea to generate a reasonable fee that will help in self sustenance of UPI system we can expect smart ways merchants could find to reduce fee outgo as happened in GST. Apparel costing Rs 2500 or more attracted GST of 18 per cent while it was 5 per cent for lower value, Merchants billed a lady buying salwar khameez costing Rs 2500 separately at Rs 1300 and Rs 1200. It should not surprise us if in case of UPI a practice may evolve of making two transactions in similar cases. While this will not benefit the system but volume of transactions can simply grow further burdening the infrastructure.
That is why a trigger of Rs 1 lakh a month is put on a merchant after which fee will apply even if all his transactions are below Rs 2000 each. We can only expect innovation to get a notch higher. A small merchant can simply put two QR codes on display for two different bank accounts keeping aggregate value per account below Rs 1 lakh.
Many times good ideas suffer from bad execution as loopholes are easily exploited, Over time there will be more rules and more attempts to break them. As Warren Buffett said, “We only have to do few things right so long we don’t do too many things wrong.” UPI is here to stay whether there is a fee or not.
The writer works in areas of IT and Renewable Energy. He can be reached at sanjivnadkarni@hotmail.com
