Delhi’s Akriti Thakkar does not remember the last time she went shopping and used cash to pay for her purchases. “I often use prepaid payment instruments (PPI) like Paytm and GPay to buy anything, from cosmetics to dresses. It has made buying so much easier and convenient.”
Thakkar is amongst the growing legion of consumers who point, click and pay, bringing delight to retailers across the country. This is reflected in the popularity of Unified Payments Interface (UPI) transactions; its total value rose 14 per cent to Rs 14.1 lakh crore in March 2023, compared to Rs 12.35 lakh crore in February, according to data by the National Payments Corporation of India (NPCI).
However, on March 24th 2023, NPCI suggested that UPI transactions made via prepaid instruments, such as digital wallets will attract an interchange fee of 1.1 per cent for certain merchant payments from April 1, 2023. It will be levied only on merchant payments of only above Rs 2,000 to specified merchant categories.
For instance, an interchange fee of 0.5 per cent will be applicable on fuel, telecom, utilities, post office, education, and agriculture will attract 0.7 per cent interchange fee. Supermarkets will attract 0.9 per cent while mutual funds, government insurance and railways are subject to a 1 per cent interchange fee.
The statutory body clarified that this fee will not be applicable to peer-to-peer (P2P) transactions or peer-to-peer-merchant (P2PM) transactions between a bank and the prepaid wallet. It also added that this decision to increase the revenue for payment service providers, who have been struggling to maintain profitability due to the low transaction fees on UPI transactions. Right now, the fintech ecosystem has to incur Rs two on every transaction worth Rs 800.
NPCI’s circulation fuelled speculations that UPI payments would become costlier after April 1, worrying merchants. To quell these doubts, Dilip Asbe, NPCI’s chief executive officer clarified on Twitter that UPI would remain free for merchants and customers making payments from their bank accounts.
A Death Knell For Digital Wallets?
The decision to leverage a 1.1 per cent interchange fee has raised another pertinent question; would it deal a body blow to the country’s digital wallet business, which has been instrumental in driving financial inclusion to the masses?
Industry players do not negate this possibility. Manan Dixit, founder of fintech start-up Fidypay, said that the move could create turmoil, especially in the digital wallet-based payment business. “As merchants must pay the interchange fee to the wallet-issuer, they might feel discouraged to accept transactions through PPIs” he surmised.
Ankit Kedia, founder and lead investor of Capital A echoed this opinion, adding that this move could create a new trend, where customers may prefer direct payments over wallets and other PPIs.
Industry watchers are also concerned that NPCI’s move could slam the brakes on the growth that digital transactions have charted over the past few years. Data from the Ministry of Electronics and IT revealed that this surged to Rs 9,192 crore in the financial year (FY) 2023 (as of December 2022) from Rs 2,071 crore in FY 2018. Transaction volume rose to 8685.3 million in March 2023 from 178 million in March 2018, while transaction value rose to Rs 14,10,443.01 crore in March 2023 from Rs 24,172.6 crore in March 2018.
Will MSME Take The Fall?
The sector that truly benefited from this scorching pace is the MSME sector. According to a Global Payments Report by the fintech firm FIS, digital wallets emerged as the leading payment sector in this domain with a 45.4 per cent market share in 2021, followed by debit cards (14.6 per cent) and credit cards (13.3 per cent). The report also stated that digital wallets would take over cash as the leading method of payment in MSME by this year.
NPCI data suggests that UPI transactions witnessed a 140 per cent growth touching Rs 422.7 crore in December 2022, almost quadrupling from Rs 175.4 crore in December 2021. Peer-to-Merchant (P2M) transactions surged to Rs 415.32 crore in February 2023 from Rs 189.58 crore in 2022. The transaction value also surged to Rs 2.79 lakh crore from Rs 1.63 lakh crore in the same period, registering a 71.1 per cent growth in the MSME sector.
Now industry players are anxious that NPCI’s decision could create a disparity between large and small and medium merchants. Amit N Kothari, the head of finance at Propelld , said that large players might be disinclined to suggest digital wallets as a payment option to their customers and might even offer cash discounts to save on the interchange fees. “However, it would not have any impact on small merchants’“ he affirmed.
Shashank Sharma, director of Scoreme Solutions added, “The cost involved is likely to dampen the overall level of transactions above Rs 2000. To that extent, they are at a disadvantage vis a vis bank to bank transactions through UPI.”
A Spot Of Silver Lining
Not everyone is a doomsayer for the future of digital wallets following NPCI’s interchange fee decision. Chirag Taneja, co-founder and CEO of e-commerce service provider GoKwik believes that the result, in the long run, can be the opposite of what is being thought of now and could even expand the digital wallet business in the country.
Abhishek Rungta, founder and CEO of Indus Net Technologies pointed out that the average ticket size for UPI P2P transactions was Rs 2,455 and Rs 860 for UPI P2M transactions. A fraction of these transactions uses a digital wallet account.
“Since P2P transactions will remain free and the average ticket size for P2M transactions is Rs. 860 the fee's impact will be on a very small percentage of the total transactions, he added.
NPCI’s decision has polarised opinions for now. But the proof of the pudding is in the eating. And this will be evident when the UPI usage and transaction figures are released for April to June quarter. It will indicate whether NPCI’s decision was a masterstroke to bring more merchants into the digital economy’s fold or a kneejerk attempt to make Digital India all pervasive.
