A ‘digitisation tax’ may come into force sometime in the future to make Unified Payments Interface (UPI) financially viable, but the burden of subsidising and incentivising fintech players could continue to rest with merchants, not consumers, according to Sameer Nigam, co-founder and CEO, PhonePe.

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Nigam’s comments came in reaction to an IIT-Bombay study, which has asked the government to consider a flat 0.3 percent facilitation fee on UPI transactions to fund the payments infrastructure and make it financially viable. If such a fee is levied, the study says, digital payments could generate as much as Rs 5,000 crore in fiscal 2023-24. As it stands, UPI transactions—bank account to bank account—remain free.

The study, which analyses the impact of the decision of the National Payments Corporation of India (NPCI) to introduce interchange fee on payments through mobile wallets, argued that the payments received by merchants should remain 'unpolluted' whether they are from UPI directly or through prepaid e-wallets.

“I am still not convinced that merchants wouldn’t pay a reasonable amount of interchange or merchant discount rate (MDR),” said Nigam. “For the last 20-30 years, whether it’s Visa, Mastercard, RuPay or net banking—somebody subsidises the cost and incentivises the players in the industry to make money. Traditionally, it has been the merchant,” he added.

Explaining that the government could rollback the zero-MDR regime in waves, wherein merchants could be asked to pay a fee to accept non-wallet payments, Nigam said, “It is sort of a digitisation tax. Broadest shoulders bear the most tax. So, maybe, they’ll start with the big merchants.” NIgam clarified that, as it stands, the government hasn’t indicated such a move.

New UPI Prepaid Payments Instruments Rules: Interoperability & Interchange Fee

The NPCI has announced full interoperability of KYC wallets (pre-paid instruments) through any UPI-enabled merchant at offline stores and online websites. However, starting April 1, such UPI transactions of more than Rs 2,000 made via prepaid payment instruments (PPI) like online wallets, pre-loaded gift cards etc, are carrying an interchange fee of 1.1 percent.

The NPCI has also specified that interchange rates will vary—from 0.5 percent to 1.1 percent—depending on the profile of the merchants.

Customers will not pay the charge, as per NPCI’s clarification. The merchant will pay “the nominal reasonable charges” for using the payment system, which now allows accepting of wallet payments regardless of the wallet being used by the customer.

For instance, a consumer will now be able to use any QR code, whether Paytm or GooglePay, at an offline or online store, and use their PhonePe wallet to make the payment—free of charge.

“It’s a positive sign that UPI rails are aligned for monetisation. That’s been a long time coming. Overall, I think it is a good sign for the industry,” said Nigam.

“While there is a 0.15 percent wallet loading cost, there is a 1.1 percent guaranteed inter-charge that comes to us as a wallet issuer,” he added.

Over the last decade, wallet companies have tied up with merchants directly and charged an MDR anywhere between 1.5 percent to 2.5 percent. The volumes were low as wallets weren’t interoperable. The wallet issuer was dependent on the shopkeeper with whom it had a tie up.

If a PhonePe wallet user went to a shop, he or she could only use a PhonePe QR code to make the payment from the wallet. “There the interchange fee (paid by the merchant) varied between 1.5 percent to 2.5 percent—we’ve typically not gone beyond 1.5 percent,” Nigam explained.

“Now, if we have acquired a merchant and somebody else’s wallet gets used, then we’ll pay the 1.1 percent. But, if our wallet customer makes a payment at somebody else’s merchant, then we’ll get paid 1.1 percent,” he added. “We don’t have as large a wallet business or play as some of our competitors. But, we have launched full KYC wallets. We do want to foray further into it.”

However, for margins, wallet issuers could charge the merchant upwards of 1.1 percent. “It will normalise or standardise across the industry—we’ll land somewhere between 1.4 percent and 1.6 percent,” said Nigam.

NPCI’s Wish Of A Level-Playing UPI Field

In 2020, NPCI first announced rules to restrict UPI market share per player to 30 percent, stipulating that “volume cap” will be implemented from January 2023. The decision was largely driven by concerns over disruption of UPI-led financial transactions as two players—PhonePe and GooglePay—held 80 percent of the market share.

However, as the deadline approached, the payments body extended the deadline by two more years until December 2024, urging existing and new players to scale consumer outreach for UPI and achieve overall market equilibrium. While welcoming the extension, Nigam issued a warning that such a move would be “totally detrimental to the incredible Indian digital payments growth story”.

“Denying consumer access to PhonePe’s UPI services is the only direct way to reduce market share,” he said, urging more entrants to jump on the UPI bandwagon and existing players to invest more to grow their own consumer base.

“It’s not normal for an entrepreneur to sit there and think about how to actually reduce the growth,” he added. The Walmart-backed company claims to have 450 million users—that’s one out of four Indians. More than 35 million merchants accept payments via PhonePe. In December alone, the payments player held 48 percent of the UPI market share, processing over 360 crore transactions.

“I am worried about the UPI market itself, if the top two players are told, ‘You can’t add more users. That’s the guideline’. Only about a fourth of India is using UPI—about 350 million people. What’s more unnatural than asking people to slow their growth is to try and shape the market when there is only 25 percent of market adoption,” he said.

“It’s like trying to shape the final set of players in the telecom industry before 4G has even launched,” he added.

On the possibility of UPI market share cap coming into effect and the impact it could have on PhonePe’s revenue and profitability, Nigam said, “I am not worried about the profitability part because a lot of it is being fuelled by the current base.”

Currently, PhonePe is in the middle of an ongoing $1 billion fundraise at a valuation of $12 billion, which makes the company the most-valued fintech in India. The new funding will be deployed to fuel verticals beyond payments such as lending, insurance, stock broking and India Stack-powered products. For instance, Pincode—the company’s hyperlocal e-commerce app—leverages the Open Network for Digital Commerce (ONDC). Nigam is confident these offerings will drive the company going forward—even as payments remains its core engine for growth.