Daybreak - NPCI's latest directive could prove to be a game-changer for Paytm

Episode Date: April 3, 2023

If you had to compare all the online payment methods available to us, digital wallets like Paytm have gone through the roughest of waters.  From being the life-saver during demonetisation to being left behind by UPI, digital wallets haven't had it easy. But last week, UPI parent NPCI released a circular about the use of digital wallets that brought a ray of hope albeit after a bit of confusion. It had to do with certain charges being levied on transactions over Rs 2,000.How could it work as a shot in the arm digital wallets and who is actually going to pay these new charges?Diclaimer:*Paytm’s founder Vijay Shekhar Sharma is an investor in The Ken.*The Ken has been part of multiple programmes initiated by GPay parent Google for news organisations globally, including, most recently, its 2022 APAC Innovation Challenge.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

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A few days ago, as I was doom scrolling through Instagram, I read a piece of news that made me mildly panic. I'm sure many of you read it too. It said that customers would have to pay a certain fee if they made UPI transactions above $2,000. It was all over social media for a bit. The news was based on a recent circular from the UPI parent company, the National Payments Corporation of India or NPCI.

But as it turns out, the circular was misinterpreted by many in the media. This was despite being given a very clear title, which said, and I'm quoting, PPI charges for merchant transactions in UPI. PPI stands for prepaid payment instruments like wallets. Many did not understand it and thought that it meant that customers would be charged for making UPI payments. The panic spread so fast that NPCI was forced to issue a statement clarifying the matter. Now, irrespective, someone is actually going to be charged. That is what the circular said.

It's just not customers. And in this lies hope. Hope for the resurrection of mobile wallets. Arundhati Ramanathan, Deputy Editor Dukhken, wrote about it recently. You see, if you had to compare all the online payment methods available to us, mobile wallets have gone through the roughest waters. From being the lifesaver for many during demonetization in 2016 to almost being reduced to nothing the following year with the introduction of KYC norms for wallet users. And then from finding hope on the push for interlopability with

UPI to finally losing it as the years went by. Wallets have not had it easy. Interlopability, by the way, is the technical compatibility that enables one payment system to be used in conjunction with another payment system. So who exactly is going to be charged and how could it help mobile wallets? Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nickda Sharma and I Don't Chase the News Cycle. Instead, thrice a week on Monday's website.

Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Monday, the 3rd of April. The new NPCI circular talks about certain charges being levied on transactions over $2,000 from the 1st of April onwards. Basically, if a customer uses a digital wallet like, say, the Ptm wallet or an Amazon pay wallet, to scan and pay through any of the 250 million UPI QR. codes that are displayed by merchants across the country, then an interchange fee of 0.5 to 1.1% will be levied. Yes, but who is going to pay it? The acquirer. And who is that? Acquirers are the UPI apps whose QR codes are displayed by the merchants, such as GPAY, phone pay or paytm.

These acquirers will have to pay the interchange fee to the wallet issuer. The acquirer can recover this payment by charging merchants a fee for accepting this transaction, that is, a merchant discount rate or MDR. For example, if I use my Paytm wallet to pay a merchant who has a GPA QR code, GPA will have to pay Ptm the fee, and then GPA may charge the merchant a fee for this transaction. Transacting via the bank account to bank account through the UPI network, however, will remain free for all. As the NPCI was first to clarify, these interchange fees are applicable only for payments made from PPI wallets. But there are a bunch of things to unpack here. We will go through them in the next segment.

At first, this move was widely seen as a chance to make more money for acquire or UPI apps. It would open up a whole new revenue stream for them. But it is, in fact, the exact opposite. It is actually a cost for UPI apps and a new revenue stream for digital wallets. You see, even though the RBI had announced that wallets should be interlopable with UPI way back in 2018, that hasn't really turned into a reality in the five years since. One reason is that there were no charges and fee frameworks for wallets introduced in all of this time. Companies were basically left to their own devices. Take Paytm, for example, which has both a wallet and offers UPI services.

According to a payments company founder that Arundati spoke to, until now, you could only use a paytm wallet to scan a PATM UPI QR code. Wallet operators charged an MDR of about 1.5 to 2% for such transactions. But there wasn't any way that you could pay from a paytm wallet by scanning a GPA QR code. And there was no incentive to adopt that kind of wallet. UPI interlopability since wallet companies were making money as it is. A payments company founder told the Ken that the NPCI has been pushing wallet providers to be interlopable with UPI, but they were skeptical to move on as they would lose this revenue

stream. So this latest measure helps solve for that. The NPCI has essentially fixed this problem by placing the burden of the transaction costs on the acquirer. And so, on the very same day that NPCI's circular went out, PayTM announced that its wallet was now interlopable with all UPI QR codes. Now, it is up to the Acquirer UPI apps to make a decision, to pass on the interchange cost to merchants or take the hit themselves.

How will these choices work out for them? Stay tuned to find out. If Acquira UPI apps choose to make the merchants pay, they will have to tell them that from the 1st of April, payments that come through their QR codes will no longer be entirely free. Payments made through wallets will carry a charge. UPI acquirers could offer merchants the choice of either accepting wallet payments and paying them the fee or opting out of it.

This also means that companies that are licensed to have wallets like Amazon Pay, pay, phone pay and pay TM now have the option to push users to use their own wallets to make QR code payments instead of regular UPI. For those like PtM which first promoted its wallet and then moved to promoting UPI, this is a chance to re-up the wallet, its flagship product. Especially because it already has close to 100 million KYC'd wallets.

Analysts too see this as an additional revenue stream for companies like PAPTM. But here's the thing. Given that this interchange fee is only on transactions above $2,000, it is not going to bring in much revenue for wallet issuers. According to RBI data, the average ticket size of a wallet transactions in February 2023 was just $363. In any case, wallet issuers will also have a small cost to bed.

Anytime the user loads their PTAM wallet, for example, with over $2,000 using their bank account, either via net banking or UPI, PATM will have to pay the bank a wallet loading fee of 0.15%. This two will start from 1st of April 23. Arundati says that the best outcome that India's payments industry can hope from this move is that it will let merchants come out of this notion that the payments received via QR code will always be free. It also sets the stage for sometime in the future, sometime well after the general elections

next year, when maybe the government finally feels comfortable. enough to start making merchants pay for UPI. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps, and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website.

I am Snigda Sharma, your host, and today's episode. The episode was edited by my colleague Rajiv Sien.