UPI promoted the country’s cashless economy and made digital transactions simple. In the last four years, UPI has more than doubled its share of retail digital payments in terms of value; however, fee income for banks, NBFCs, and fintech companies has dropped by nearly a third. They are not compensated for UPI transactions.
In fact, due to the free and simple service, the use of the Unified Payments Interface (UPI) has grown rapidly year after year. In the first nine months of FY 2021-22, UPI’s share of person-to-merchant payments increased to 42 percent, up from 28 percent in FY 2020-21. In February, the UPI platform accounted for roughly 80% of all retail digital payments in terms of value. This does not include transactions made through IMPS and NEFT.
In four years, UPI transactions increased from 38% to 81%.
Banks’ fee income has decreased.
According to analysts, banks’ fee income has decreased as the number of UPI transactions has increased. For example, Axis Bank’s total fee income from retail card fees fell to 1.9 percent in the third quarter of this fiscal year, down from 2.5 percent four years ago. Other financial institutions are in a similar situation.
In a note, analysts at HDFC Securities wrote that “amid increasing competition in the payment processing business, payments fee income across the ecosystem has been steadily declining due to increased transactions through UPI.”
The number of banks participating in the MDR payment pool is large, and the loss is even greater.
Banks, in fact, have the largest share of the MDR payment pool because they issue the majority of the cards. Merchants can be charged for card-based payments and other digital transactions, but not for UPI payments.
To promote cashless transactions, UPI transactions will be free starting in 2019.
In order to promote the country’s digital payment system, the merchant discount rate (MDR) for UPI transactions was reduced to zero in 2019. Previously, merchants had to pay MDR to the payment service provider for each digital transaction.