- The National Payments Corporation of India (NPCI) has allowed prepaid payment instruments (PPIs) to be part of the interoperable Unified Payments Interface (UPI) ecosystem.
- The NPCI has recently introduced interchange fees of up to 1.1 per cent on merchant UPI transactions done using prepaid payment instruments (PPIs) from April 1.
Prepaid Payment Instruments (PPIs)
- PPIs are instruments that facilitate purchase of goods and services, conduct of financial services, enable remittance facilities, etc., against the value stored therein.
- Examples: PPI include online wallets (like Paytm Wallet, Amazon Pay Wallet, PhonePe Wallet, etc.), smart cards, magnetic chips, vouchers and preloaded gift cards. A PPI payment done via UPI refers to a transaction done via such a wallet through a UPI QR code.
- PPIs can be issued by banks and non-banks. Banks can issue PPIs after obtaining approval from RBI. The non-bank PPI issuers are companies incorporated in India and registered under the Companies Act, 1956 / 2013.
- Closed System PPIs: These PPIs are issued by an entity for facilitating the purchase of goods and services from that entity only. Cash withdrawals are not permitted. These instruments cannot be used for payment or settlement for third party services.
- The new NPCI guidelines on wallet interoperability establish interchange fee for wallet usage, which will be paid to issuers of wallets such as Paytm, PhonePe and Google Pay, among others.
- They also include charges for UPI-wallet-loading that will be paid by wallet issuers to remitter banks or the bank accounts from which the amount is being debited.
- Benefit for wallet players:
- The inter-operability norms will enable universal acceptance of wallets across all UPI QR codes and devices, thus increasing the salience or relevance of wallets.
- It will also ensure uniformity and parity by clearly defining the interchange fees on wallet payments as against the current practice of bilateral agreements between wallet issuers and payment platforms.
- Interchange fees:
- The interchange rates vary according to merchant category codes, in the range of 0.5 per cent to 1.1 per cent.
- Categories such as fuel, education, agriculture and utility payments attract a lower interchange of 0.5-0.7 per cent; convenience stories across food shops, specialty retail outlets and contractors, have the highest charge of 1.1 per cent.
- Wallet transactions:
- The interchange fees are paid by merchants to wallets or card issuers and are usually absorbed by merchants.
- Smaller merchants and shopkeepers are unlikely to be impacted as it is applicable only on payments of over ?2,000.
- MDR or merchant discount rate is applicable on wallets-on-UPI in certain cases and this move may lead to higher MDRs imposed on merchants, depending on payment companies’ ability and willingness to pass on the interchange.
- Impact on Customers:
- The norms are expected to increase the appeal, scope, role and usability of wallets as they can now be used to make UPI payments across QR codes and devices, increasing payments alternatives for customers.
- Consumers will also be able to load their wallets from anywhere including credit or debit cards, BNPL (Buy Now Pay Later) and net banking, among others, thus creating a mechanism to use any instruments for UPI transactions, albeit directly or indirectly.
- Currently, MDR for bank-to-bank UPI transactions is zero.
Digital Transactions in India
- The Government of India has been working towards expanding digital transactions in the Indian economy to improve the financial sector and make citizens’ lives easier.
- Major digital payment modes: Bharat Interface for Money-Unified Payments Interface (BHIM-UPI), Immediate Payment Service (IMPS), and National Electronic Toll Collection (NETC) have undergone significant growth in the last five years.
- BHIM UPI has emerged as the most preferred payment mode of citizens and has recorded 803.6 crore digital payment transactions worth ? 12.98 lakh crore till January 2023.
- Status of Digital payment transactions:
- Total number of digital transactions (2022-23) : 9,192 crore
- Total value of digital transactions(2022-23) : ?2,050 lakh crore
Challenges of digital transactions
- Digital illiteracy: A significant portion of the population, especially in rural areas, may not be familiar with digital payment systems and may face difficulties in using them.
- Connectivity issues: Digital transactions require a stable internet connection, which may not be available in all areas. This can cause delays and disruptions in the payment process.
- Security concerns: Digital payments can be vulnerable to cyber threats and frauds. Malicious actors can steal sensitive financial information and make unauthorized transactions.
- Technical glitches: Technical glitches can occur during digital transactions, leading to failed transactions or incorrect transfers.
- Transaction fees: Some digital payment systems may charge transaction fees, which can discourage people from using them.
- Limited acceptance: Not all merchants and service providers may accept digital payments, particularly in remote areas.
- Dependence on technology: Over Reliance on digital payment systems can make people vulnerable to disruptions in case of technical failures or system outages.
Advantages of using digital payments
- Instant and convenient mode of payment: Digital modes like BHIM-UPI and IMPS enable instantaneous transfer of money to the beneficiary account. BHIM-UPI has enabled access to multiple bank accounts in a single mobile app.
- Enhanced financial inclusion: Digital payments offer anytime, anywhere access to accounts, making it easy for citizens to receive and make payments using their phones. Recently launched UPI 123PAY enables feature phone users to make digital transactions through UPI in assisted voice mode, facilitating digital transactions and financial inclusion in rural areas.
- Increased transparency in government system: Benefits are directly transferred to the target beneficiary account through digital modes of payments, eliminating leakage and ghost recipients.
- Improved speed and timely delivery: Digital payments can be virtually instantaneous, regardless of the sender and receiver’s location.
- National Electronic Toll Collection (NETC) system: The NETC system enables electronic payments at toll plazas using Radio Frequency Identification technology.
- Bharat Bill Payment System: The BBPS provides an interoperable and easily accessible bill payment service to consumers via multiple channels like Internet banking, mobile banking, mobile apps, BHIM-UPI, etc.
- Enhanced Credit Access: Digital payments establish a user’s financial footprint, increasing access to formal financial services, including credit.
- Safe and secure: Digital payments are safer than cash payments and eliminate the need for recipients to travel long distances.
- Digital transactions have become an integral part of modern-day commerce, providing convenience, security, and speed for both customers and businesses.
- There is a need for regulatory intervention to explore alternative payment methods, such as digital wallets and UPI, which offer lower transaction fees.
- Overall, the benefits of digital transactions outweigh the challenges, and as technology continues to evolve, we can expect to see further innovation in the payments landscape.