NPCI interchange fee of 1.2% on UPI credit lines may set off a revolution

Mumbai: The National Payments Corporation’s decision to set an interchange fee of 1.2% on interest-free credit on Unified Payment Interface (UPI) transactions is likely to set off a revolution in the loan market, according to experts. 

According to a letter written to UPI members on 16 August, NPCI fixed the fees for the payer PSP (payment service provider) or the bank that powers the UPI app at 5 basis points and the app at 4 bps for interest-free loans. However, in the case of interest-bearing loans, both will receive a fee of 4 bps each. The rest goes to the bank that issues credit. 

There will be no fee on transactions of less than ₹2,000. (100 basis points make up one percentage point).

Interchange refers to the fee paid on every transaction to the bank offering credit. A merchant pays a merchant discount rate or fee to the acquiring bank facilitating every transaction. MDR typically includes interchange and other miscellaneous fees. It takes care of the risk and interest for the credit extended by the bank. The consumer does not pay any fee in this transaction. 

A credit line on UPI is a pre-sanctioned loan for the customer using a bank account, which is linked to an individual’s UPI account. It will work like a credit card. But the interchange fees is less than 1.8% charged on credit cards, making it more attractive for merchants.

Also Read: NPCI unveils UPI Circle to allow account holders to add secondary users; check security features, benefits and more

According to NPCI, the new interchange fee will help increase the issuance and adoption of credit lines on UPI, which will help UPI merchants get incremental business. 

“This is a paradigm shift, a major shift away from what the world has been used to till now … the bank is literally in your pocket,” said Sivaram Kowta, president of Zeta India, which provides next-gen banking technology to financial institutions globally. “Till now, for loans, you pretty much still had to go to the bank. Even the BNPL players offer a single interest rate, and you have to take that and use it. But now multiple credit products, including an auto loan, a consumer durable loan or a general loan can all be accessed via the same credit line.”  

Also Read: Can NPCI’s new UPI credit line be an alternative for entry level credit cards?

According to Zeta, credit line-based transactions on UPI are expected to touch $1 trillion by 2030. By 2027, 40% of all digital person-to-merchant (P2M) transactions are expected to shift to credit. 

Currently, only ICICI Bank offers its existing customers a pre-approved credit line on UPI with its ‘PayLater’ product. The limit, based on a customer’s eligibilty, ranges between ₹7,500 and ₹50,000.

Others such as Axis Bank, HDFC Bank, Kotak Mahindra Bank and State Bank of India are testing this feature within limited user groups on a pilot basis. Recently, Navi tied up with Karnataka Bank to launch credit on UPI. However, banks are likely to be more cautious in launching this product in a big way because of underwriting small-ticket loans. 

Also Read: NPCI records nearly ₹10,000 crore credit disbursed through UPI every month

“The credit line product is unsecured lending coupled with small ticket size. Banks or any prudent lender will take a cautious approach before scaling the product. Hence, banks would always prefer first existing customers, get early reads and then scale to new bank customers,” said Mohit Bedi, co-founder, Kiwi, the first fintech company to launch credit on UPI by issuing digital RuPay cards in partnership with banks. “This evolution will take its time, and rightly it should be like that.”  

Bankers expect specialized products in future

Bankers, however, expect the product to take off once non-banking finance companies are allowed to offer credit on UPI.  

While the first offerings may be experimental and for a general purpose, bankers expect specialized products in future in the form of ‘buy now, pay later’ (BNPL), overdraft or an EMI product. 

Also, banks will have to design the product in such a way that acceptance among merchants is high. According to Zeta’s estimates, nearly 15,000 to 20,000 merchants are already deactivating payment options where an interchange fee is paid. Banks will have to ensure that the financials are working out for them.