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India has finally put a price on larger transactions on its ubiquitous digital payments network, ending years of free processing for merchants as authorities seek to make a system used for billions of payments each month financially self-sustaining. The country’s Unified Payments Interface (UPI) will impose a 0.4% merchant fee on certain payments above ₹2,000 (about $21) from October 15, the National Payments Corporation of India (NPCI), which operates the network, said on Tuesday. Consumers will continue to use the service for free, NPCI said. Credit card merchant fees typically range from 1.5% to 2.5% per transaction, while debit card fees are capped at 0.9%, according to an FAQ (PDF) released by NPCI. UPI’s merchant fee is capped at ₹300 (about $3) for transactions of ₹75,000 (around $783) or more, while payments of ₹2,000 or less will remain free for merchants. Small merchants receiving up to ₹100,000 (about $1,041) a month through UPI will also be exempt from the charges. Some sectors, including railways, telecom, insurance, and fuel, will pay a flat ₹5 (about 5 cents) fee on UPI transactions above ₹2,000. Capital-market transactions will attract a 0.02% fee, capped at ₹300, NPCI said. The move marks a major shift for a payments system that has been free for merchants to accept since 2020. It has been long anticipated by the payments industry, which has argued that the zero-fee model made it difficult to cover the growing cost of operating the network. In August, New Delhi laid the groundwork for the shift when it amended India’s payments law to allow merchant fees on some UPI transactions. A notification issued on Monday specified that banks cannot levy charges on UPI payments of up to ₹2,000, clearing the way for fees on larger transactions. UPI has emerged as the spine of India’s digital payments economy, processing 24.51 billion transactions worth ₹29.9 trillion (about $312 billion) in August alone, per the recent data by NPCI. Its ubiquity over the last few years has made scanning a QR code one of the most common ways to pay in India. India scrapped merchant fees on UPI payments in January 2020 to boost adoption. The Indian government has since subsidized banks and payment firms for processing some of those transactions. However, authorities have argued for the last few months that the cost of operating UPI at such a vast scale makes the current model unsustainable. Industry estimates, per NPCI, put the annual cost of running the network, including server capacity, fraud prevention, and technical support, at about ₹200 billion ($2.1 billion). The newly announced merchant fees, NPCI said, will be distributed among participants in the UPI ecosystem and used to fund investments in infrastructure, cybersecurity, fraud prevention, and customer service. NPCI did not respond to questions about how it arrived at the ₹200 billion annual cost estimate, how much revenue it expects the new fees to generate, or how that revenue will be distributed across the UPI ecosystem. The shift has raised questions over whether charging merchants could chip away at one of UPI’s biggest attractions: its cost. Even though consumers will not be charged directly, businesses accepting larger payments will now have to absorb a fee that did not exist before. Krishnamurthy Subramanian, a former chief economic adviser to the Indian government, noted that UPI should be treated as digital public infrastructure whose benefits extend well beyond individual transactions, including by reducing reliance on cash, bringing more businesses into the formal economy, and widening access to digital payments. “The right question is: what is the opportunity cost of charging UPI transactions and what are its social benefits?” Subramanian wrote in a post on X. The debate also comes as India continues to bear the cost of maintaining a vast cash network. Currency in circulation is still growing at double-digit rates even as cash accounts for a declining share of individual transactions, as the BBC recently reported, citing data from the Reserve Bank of India. NPCI has sought to limit that risk by keeping smaller transactions outside the new fee regime. Payments of up to ₹2,000 account for more than 95% of UPI merchant transactions by volume, it said. The payments operator also plans to use part of the fees to create a fund aimed at expanding digital-payment infrastructure and merchant adoption in smaller cities and rural areas. The fund’s details will be worked out with India’s central bank over the next three months, NPCI said. The new fee could also provide a revenue boost to payment companies that have spent heavily building the infrastructure to process UPI transactions. Fintech firms including Paytm and Pine Labs, as well as IPO-bound PhonePe and Razorpay, are among the companies that could benefit as the merchant fee is distributed across the payments ecosystem. That said, the bigger test of the move will come once the fees take effect, and whether merchants absorb the added cost or encourage customers to use other payment methods, particularly for larger purchases and in businesses with thin margins. Merchants will not be allowed to pass the fee on to customers, NPCI said, arguing that the 0.4% charge is low enough for businesses to absorb. Consumers will continue to pay the listed price regardless of whether they use UPI, it stated.
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