Hello, this is Priyanka Salve writing from Mumbai.
Welcome to the latest edition of Inside India. A one-stop-shop for the stories and developments of the world’s fastest growing large economy.
India’s Unified Payments Interface, the world’s largest payment system, has popularized cashless transactions in the country by offering free services to everyone. That is about to change. Starting next month, merchants will have to pay a 0.4% fee when accepting payments over $20.
While the government has defended the move, confident it will not hinder India’s progress towards a cashless economy, critics disagree.
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The Indian government’s decision to impose a fee on merchants using UPI, the globally acclaimed real-time digital payment system, to reduce the use of Visa and Mastercard has sparked a heated debate in the country.
Some critics have questioned the need for the government to charge for what it previously called “digital public goods,” but Prime Minister Narendra Modi’s political opponents say the government is bowing to pressure from the United States.
The National Payments Corporation of India announced on Tuesday that it would impose a 0.4% fee on merchants receiving payments over 2,000 rupees ($20.84) via UPI. For transactions above Rs 75,000, the fee will be capped at Rs 300 per transaction, it added.
The umbrella organization that manages India’s retail payments system says person-to-person transactions on UPI will continue to be free and even the fees charged to merchants are much lower than the 0.9% for debit card transactions and the 1.5-2.5% for credit cards.
bouquet and brick bats
Fintech companies welcome the move to impose fees on merchants.
“UPI’s success was built on zero-cost adoption by consumers, small merchants, and micro-enterprises, and the notified MDR framework maintains that foundation,” Girish Krishnan, director of payments experience at Amazon Pay, told CNBC.
Kunal Shah, head of WhatsApp Pay at Meta, called it a “great step forward.” Paytm, another popular payments app, said the move would help it generate additional revenue from merchant business.
In 2020, the Indian government reduced the merchant discount rate (fees charged by merchants when accepting payments via UPI) to zero to encourage digital transactions in the country. As a result of this move, the transaction value of UPI increased tenfold to 213 trillion rupees in about six years until January 2025.
The World Bank noted earlier this year that “UPI makes digital payments feel like cash to users, quickly gaining widespread acceptance and being free at the point of use.” That “feel” is changing, and the government’s actions are becoming the subject of intense scrutiny and criticism.
Ashneel Grover, former CEO of Indian fintech company BharatPe, criticized the move to levy merchant fees, adding, “Any tax on UPI is just a tax.”
India’s opposition party, the Indian National Congress, accused the government of favoring American companies, saying the move would lead to “money being collected from the pockets of Indians and filling the coffers of American companies such as PhonePe, Google Pay and Amazon.” Some commentators say the measure will encourage people to return to cash transactions.
level playing field
According to NPCI data for September, the UPI payment system processes more than 1.1 million transactions every two minutes on average. In January, the Indian government announced that UPI surpassed Visa in terms of daily transaction volume, accounting for 85% of digital payments in India and 50% globally.
These numbers caught the attention of the U.S. Trade Representative, who in a report earlier this year expressed concern that policies governing electronic payment services in India “appear to favor domestic suppliers over foreign suppliers, creating an uneven playing field.”
The USTR report also said that US electronic payment service providers will not be able to participate in Indian ecosystems such as UPI credit transactions and domestic card payment network RuPay.
Experts told CNBC that while UPI will no longer be free for everyone, new merchant fees are unlikely to favor card companies like Visa, Mastercard and Amex.
However, this fee helps strengthen the unit economics of platforms like Walmart-owned PhonePe and Google Pay. The two payment apps collectively account for 85% of UPI transactions by value and nearly 81% by volume, according to a report by Indian brokerage firm Ambit Capital.
A person uses a QR code from the Phonepe digital payment app while selling Indian flags at a roadside stall ahead of India’s Independence Day on August 12, 2024 in Kolkata, India. (Photo courtesy of Sudipta Das/NurPhoto, Getty Images)
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“A 0.4% interest rate is significantly lower than a 1.5% to 2% credit or debit card rate,” Neil Shah, vice president of research at Counterpoint Research, told CNBC, adding that it gives merchants “every financial incentive to support UPI rail.”
According to a Reuters report, UPI transactions above Rs 2,000 account for only 4% of merchant payments, but account for about 67% of transaction value, making them a huge revenue generator for payment system providers such as banks and fintech companies.
The fee to merchants on transactions over 2,000 rupees would unlock a “very lucrative” revenue pool of up to 245 billion rupees ($2.5 billion) into the sector, according to a report by Ambit Capital.
“India’s unique zero MDR (merchant discount rate) UPI environment stands in stark contrast to the high-margin global card market,” the report said, adding that it has encouraged fintech companies to rely on “cross-selling financial products and value-added services” to generate profits.
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very soon
September 17: National Stock Exchange IPO begins.
September 23: HSBC Latest PMI for September.
