19/01/2024

The Unified Payments Interface (UPI) allows any smart phone user to instantly transfer money between banks, merchants, and mobile wallets 24/7. At its core, UPI connects bank accounts using a distinct Virtual Payment Address rather than account details. This enables secure real-time sending and receiving of funds directly between parties. Leading banks have quickly integrated UPI, developing feature-rich apps that allow customers to leverage UPI via mobile to transfer money seamlessly.

What is UPI?

UPI is the backend infrastructure linking bank accounts and merchant systems to power seamless app-based digital payments. It uses a Virtual Payment Address proxy tied uniquely to each bank account. This abstraction layer enables consumers to instantly pay anyone without exposing sensitive financial information. In turn, major banks have built mobile apps harnessing UPI to allow customers to conveniently access features like scanning QR codes, sending payments to contacts, receiving cash back rewards, and more. The sophistication of these apps combined with UPI's real-time transfer capacity across India has made it the payments gold standard.

Transaction Limits

The maximum daily transaction limit per UPI account is Rs. 1 lakh, increased to Rs. 5 lakh for payments to educational institutions and hospitals. Individual banks can set custom limits ranging from Rs. 25,000 up to Rs. 1 lakh per day. Banks may also specify weekly or monthly UPI transfer caps.

Merchant Interchange Fees

A new rule has introduced interchange fees on some types of UPI-based merchant payments. An interchange fee ranging from 0.5% to 1.1% applies when customers pay a merchant using certain mobile wallets connected to UPI. This fee covers processing costs and generates revenue for banks and payment service providers.

Who Pays Interchange Fees?

For personal peer-to-peer UPI transfers between individuals, no charges apply. Interchange fees also do not apply to payments made directly via bank UPI apps. The merchant receiving the payment is responsible for paying interchange fees. Customers are not impacted when paying standard businesses via UPI.

Thresholds for Charges

Interchange fees for UPI-based payments only apply for merchant transactions over Rs. 2,000 made through prepaid payment instruments (PPIs), which include popular mobile wallets like PayTM, PhonePe, Amazon Pay. There are no charges for wallet-based UPI merchant payments below Rs. 2,000.

Why Fees for Wallets but Not Bank Apps?

To drive adoption of their own UPI apps, banks absorb processing costs for payments made directly through bank UPI apps. However, banks levy charges when payments occur through a third-party non-bank wallet, passing the interchange fee to the merchant. Encouraging use of bank UPI apps gives banks better visibility into customer spending patterns and needs.