A digital payment service is demonstrated. (Photographer: Samyukta Lakshmi/Bloomberg)

The Days Of Free UPI Money Transfers May Be Ending

Three years after the unified payments interface was introduced, larger banks plan to start charging customers for transactions done via the platform.

Bankers, who have seen UPI-based payments become the go-to option, feel the platform has now stabilised to a level where charges can be introduced, said two people familiar with the ongoing conversations between banks and the National Payment Corporation of India.

Not all transactions are likely to draw charges, though.

Just like in the case of cash withdrawals at ATMs, banks may charge beyond a certain number of free transactions a month. These charges will be levied only on peer-to-peer transactions and not on those where merchants are being paid for services.

According to a senior banker, the first of the two people quoted above, charges are definitely being considered although no final decision has been taken. The banker, who spoke on the condition of anonymity, said that the idea is not to earn fee income but to cover the cost of these transactions.

A senior official at NPCI said that charges might also help to reduce frivolous transactions on the UPI network and improve the quality of transactions. The official spoke on the condition of anonymity.

Kotak Mahindra Bank became the first lender to move in this direction. On April 1, it introduced charges for more than 30 peer-to-peer transactions. The charges were set at Rs 2.5 per transaction worth up to Rs 1,000. For transactions worth more than Rs 1,000, the bank would charge Rs 5, after the limit of 30 free transactions is exhausted by the customer.

Determining The Correct Charges

Banks have often been targeted for introducing unnecessary charges on services ranging from cash withdrawal via ATMs to cheque books and others. While lenders cite the cost in delivering these services as the reason for charges, there is little specific information on costs and earnings from each product.

Currently, banks and other payments companies pay about 10 paise to NPCI for using the UPI platform to conduct a transaction worth up to Rs 1,000. For transaction above Rs 1,000, the charge increases to 50 paise. Payment service providers also pay an interchange fee for conducting the transaction with a counter-party, which is the bank holding the account of the person receiving money. Till now, 144 banks and other payments services are live on the UPI platform.

Those base costs and the fee benchmark set by the Immediate Payments Service platform may be used to determine the charges on UPI transactions, the senior NPCI official said.

Currently, on IMPS, banks charge up to Rs 5 for transactions worth up to Rs 1 lakh and Rs 15 for transactions above. IMPS is also the base platform on which UPI was built. The key difference is that customers do not need to share their personal data like a bank account number with others to transact on UPI.

Ready For Charges?

In June 2017, a year after UPI transactions were introduced, private sector lender HDFC Bank said that it will introduce a Rs 3 charge on transactions worth up to Rs 25,000 and a Rs 5 charge on transactions worth more than that.

HDFC Bank eventually withdrew the charges after NPCI asked banks to not charge customers as UPI had not reached critical mass at the time. Charges could hinder adoption of the service, NPCI had said.

Since then, however, UPI transactions have jumped.

Between April 2018 and April 2019, the value of UPI transactions recorded each month has grown four to five times, while the volume of transactions has also reported strong growth. According to monthly data available on the NPCI website, in April, banks and other service providers reported more 78 crore transactions worth over Rs 1.42 lakh crore.

Vivek Belgavi, partner and fintech leader at PwC India, said that while the impact of charges on volume of UPI transactions remains to be seen, he is optimistic. Introducing charges is also important as transaction applications built on UPI should be self-funded, he said.

A charge will ensure that the platform improves and more people are able to gain better value. It will also put the onus on operators to provide value to the end users. Now how this will impact UPI transactions is something that we have to watch in due course of time. I personally would be optimistic of UPI adoption growth.
Vivek Belgavi, Partner & Fintech Leader, PwC India