Payments companies seek ‘assured’ share of sops to keep low-value UPI free

Payment aggregators, crucial in popularising UPI payments, are seeking an assured share of the government subsidies provided to banks to keep low-value UPI transactions free, two people aware of the development said.

They want this share to be explicitly stated by the government in an official notification, one of the persons cited above said.

In the interim budget, the government allocated ₹3,500 crore to cover the cost of enabling low-value transactions, ensuring they remain free for both merchants and users. For transactions above ₹2,000, the government allows a merchant fee of 1.1%.


"We have requested the department of financial services to define the share of all payment system operators and banks so that we get our share of these subsidies," a senior official with a payment aggregator said. "Some banks have completely refused to share the subsidy amount, some other banks have made ad-hoc payments while a few others have given dues that were payable two years ago."

Another official said that the zero merchant discount rate (MDR) regime should be done away with.

"The government should abolish zero MDR, we don't charge anything for building the UPI infrastructure, if we don't get a part of these subsidies there is no scope for us in making any money through UPI payments," he said. "Government gives money to banks and they claim the entire amount, whatever we get depends on their whims and fancies. The gazette notification brought out by the government broadly mentions payment system providers but there is no distribution ratio mentioned, that categorisation should be done"

To promote low-value payments, in 2021 the government said it will reimburse the zero merchant discount rate (MDR) on low-value UPI and RuPay debit card transactions. This was done to reduce the potential adverse impact of the zero-MDR regime on the growth of the digital payments ecosystem.

In FY22, the government had allotted ₹1,500 crore for this scheme, which was increased to ₹2,600 crore in FY23. In the interim budget, the government approved the proposal for the continuation of the incentive scheme for FY24 with a financial outlay of ₹3,500 crore.

In December 2021, the steering committee of the National Payments Corporation of India (NPCI) decided that the acquiring bank would have to share a 0.15% incentive with the issuing bank while a share of 0.025% was to be given to the payment system operator for each transaction.

According to an analysis done by PwC, stakeholders incur a cost of nearly 0.25% of the transaction value for processing a UPI person-to-merchant transaction. For fiscal year 2023-24, stakeholders incurred a cost of about ₹12,000 crore assuming a flat average MDR rate of 0.25%.

As per PwC, out of this ₹4,000 crore was solely incurred to process low-value UPI transactions below ₹2,000.

UPI transactions clocked a new high in May by processing 14.04 billion transactions worth ₹20.45 lakh crore. This was a 6% rise compared to 13.30 billion in April in terms of volume and 4% in value terms against ₹19.64 lakh crore in April.