The UPI payment fee: An incomplete solution to larger challenges

The National Payments Corporation of India (NPCI) recently announced a 1.1% fee on UPI transactions above ₹2,000 made from prepaid payment instruments such as wallets. However, this move fails to address the industry's main challenges.

Rather than imposing a new fee, the NPCI should focus on compensating intermediaries for all UPI payments using funds from the government, Reserve Bank of India (RBI), and commercial banks. This would help address the issue of low margins for intermediaries, which has been a

major challenge for the industry.

While the UPI system has seen tremendous growth in recent years, with over 2 billion transactions in March 2021 alone, intermediaries such as payment service providers and payment aggregators have struggled to make profits due to low transaction fees. This has led to many players exiting the market or merging with larger players.

By compensating intermediaries for all UPI payments, the NPCI can ensure that these players remain in the market and continue to provide value

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consumers. This would also help promote competition and innovation in the industry.

The NPCI could use funds from the government, RBI, and commercial banks to compensate intermediaries for all UPI transactions. This would not only help address the issue of low margins but also ensure that the costs are borne by all stakeholders in the ecosystem.

Moreover, this move would also be in line with the government's push for digital payments and financial inclusion. By ensuring that intermediaries can operate profitably,

the NPCI can help promote the adoption of digital payments in the country.

The NPCI's decision to impose a new fee on UPI transactions above ₹2,000 made from prepaid payment instruments fails to address the industry's main challenges. Instead, the NPCI should focus on compensating intermediaries for all UPI payments using funds from the government, RBI, and commercial banks. This move would help promote competition and innovation in the industry while also promoting the adoption of digital payments in the country.