Sept 15 (Reuters) - India's payments authority said on Tuesday a 0.4% fee would be levied on transactions above 2,000 rupees (about $20) made to merchants through the homegrown UPI network, ending more than six years of zero-cost payments that powered its rapid adoption.
The charges, starting on October 15, cannot be passed on to consumers and are expected to benefit banks and payments firms in Asia's third-largest economy.
The Unified Payments Interface processed 24 billion transactions totalling $311 billion in August, with the market being dominated by firms such as Walmart-backed PhonePe and Alphabet's Google Pay.
Payments made via UPI to specific merchants such as railways, telecom services, insurance and fuel, among others, will attract a flat fee, called merchant discount rate (MDR), of 5 rupees, said the National Payments Corporation of India, a quasi-regulator and operator of the UPI.
For other merchants, the fee on transactions above 75,000 rupees will be capped at 300 rupees.
The charges will be distributed among the firms facilitating the transactions and are being introduced to bolster investment into infrastructure resilience, innovation, cybersecurity and customer service, NPCI said in a release.
The largest chunk of MDR will be earned by the bank of the person making the payment, with the rest being split among the merchant acquiring bank, the payment app and payment service providers.
The change follows India's amendment to its payments legislation on Monday to allow fees on UPI transactions of more than 2,000 rupees.
"Sustained investment in technology, cybersecurity, fraud prevention and reliability is required to scale UPI to 90% of all retail payments. MDR will allow for this investment," said Amrish Rau, chief executive at Pine Labs.
PROTECTING CONSUMERS, SMALL MERCHANTS
Earlier in the day, India's opposition leader Rahul Gandhi criticised the government's decision, saying it would add to the burden on consumers as merchants would pass on the charges.
India's federal government, in a separate release, said UPI app providers are explicitly prohibited from levying platform fees or hidden charges, while banks have been advised to ensure that merchants do not pass MDR charges to customers.
The NPCI's release also said small merchants, defined as those receiving up to 100,000 rupees per month via QR code payments made on UPI, would be exempt from MDR.
The government has decided to establish a dedicated fund for promoting the use of UPI by small merchants with a contribution of 5% of total MDR collections.
"The proposed dedicated fund will support the expansion of UPI acceptance among small merchants... (and) will be finalised in consultation with the Reserve Bank of India within the next three months," NPCI said.
Additionally, the fees on capital market transactions, including payments for mutual fund and stock investments, have been set at 0.02% of the transaction value with a cap of 300 rupees to "encourage retail participation in formal financial markets", NPCI said.
UPI payments to merchants made via QR codes in rural and semi-urban locations will also not attract any fees, it said.
