Merchant payment via wallets on UPI to attract 1.1% interchange from Apr 1

Come April 1, wallet holders will be able to use their balance to pay merchants with any UPI QR code, thus paving the way for the interoperability of digital wallets on the UPI platform.

However, these transactions will attract an interchange of 1.1 per cent of the transaction value if the transaction value is above Rs 2,000. The interchange fees has to be paid to the issuer of the wallet when the wallet holders pay through their wallet balance on UPI.

Further, the prepaid instrument (PPI) issuer will have to pay 15 basis points as wallet loading service charge to the remitter bank (account holder’s bank) for loading transaction value greater than Rs 2,000 on the wallet. However, an interchange fee will not be required to pay for peer-to-peer (P2P) transactions and P2PM transactions between the bank account and the PPI wallet.

Following these guidelines, Paytm Payments Bank, an associate company of Paytm, announced that all its full KYC wallet customers will now be able to make payments on every UPI QR code and online merchant where UPI payments are accepted.

Consequently, the bank will earn 1.1 per cent interchange revenue when Paytm Wallet customers (i.e., the KYC wallets issued by Paytm Payments Bank) make payments on merchants acquired by other payment aggregators or banks. And the bank will pay 15 bps of charges for adding more than Rs 2,000 using UPI and, in turn, will also earn 15 bps when any other wallets use the bank to add more than Rs 2,000 using UPI.

According to a research note issued by Citi, the interoperability of wallets with UPI significantly improves the salience of wallets. Wallets can now be used on UPI rails (250 million QRs as of Feb 23) and, unlike UPI itself, have better convenience (load wallet once and use multiple times vs entering UPI code at every instance of payment).

“Since consumers can load their wallets with money from anywhere (credit card, BNPL, debit card, net banking etc.), the new rules also likely to create a mechanism for using any instruments via UPI, albeit indirectly, because consumers have to load the wallet with the instrument of their choice and then use the wallet at UPI QR-codes”, the note said.

This move of NPCI is expected to be positive for Paytm, which has a 60 per cent share in wallets. This will mean Paytm wallets will gain universal acceptance across all UPI QRs and devices.

Also, since the interchange fees is to be paid to the wallet issuer, Paytm and other payment apps will pay interchange to Paytm Payments Bank when Paytm wallets are used at 250 million UPI QR codes. Further, since wallet loading charges will be paid by issuers like Paytm Payments Bank to remitter banks, for Paytm itself, these changes impose regulator-defined interchange commercials in place of the extant bilaterally-agreed commercials between Paytm and Paytm Payments Bank and are, therefore, a positive from a governance perspective.

According to experts, the NPCI circular on full interoperability of KYC wallets across all UPI merchants is a significant step towards the growth of digital payments in India. The guidelines make wallets more appealing to customers by opening up newer payment-use cases.